Wealth destruction the new normal

Allister Heath
WEALTH preservation is now the name of the game in the West. The challenge, for most people, is not to make more money: it is to try and preserve what they have. Declining equity and property prices, ultra-low interest rates, lowish pay rises, elevated inflation and increasing taxes are combining to squeeze nearly everybody. This shouldn’t come as a surprise: the UK economy shrank by about six per cent during the recession; and there has been far too much borrowing from future expected production to fund consumption today. A country that produces less (which is what it means to have a smaller economy) must consume less; the value of its land and companies will also be worth less.

There is wealth destruction almost everywhere one looks. Inflation on the retail price index is at five per cent: the real value of everything is falling by that amount. Take cash. To beat inflation, a basic rate taxpayer needs to find a savings account paying 5.50 per cent, a 40 per cent taxpayer needs to find an account paying at least 7.33 per cent, and somebody paying the 50 per cent tax rate...well, they shouldn’t even bother. Basic rate taxpayers can choose from just eight accounts that negate the effects of tax and inflation, all of which are fixed-rate ISAs; in the main, it is a disaster for savers, especially for those who have cash that is not eligible for tax protection and who pay higher rates of tax. Moneyfacts calculates that the effect of inflation on savings means that £10,000 invested five years ago allowing for average interest and tax at 20 per cent would have the spending power of just £9,374 today.

Average total pay is increasing at 2.6 per cent a year, which translates into an annual real pay cut of around 2.4 per cent. No wonder an Ipsos Mori poll for the Resolution Foundation reveals that just 48 per cent of people in low-to-middle income households have cash left over at the end of each month. Just 27 per cent of these make monthly savings. The middle classes are also being hammered.

What about property? Prices in London, especially in prime areas, are holding up or even increasing as a result of global demand from investors keen to protect themselves against instability. But across the UK, they are down 0.3 per cent over the past year – which in real terms is a drop of over five per cent. Residential property in the UK as a whole has further to fall, especially in real terms; prices have yet to readjust to earnings.

Equities are hardly any better. The FTSE 100 closed at 5,129.42 yesterday; its 52-week range has been a miserable 4,791-6,105.80. Once adjusting for inflation, returns are even worse than the index performance would suggest. This is hammering the middle classes and those with pension pots. Many individual stocks look cheap; but the markets are terrified of the possibility of a Eurozone led recession.

Apart from precious metals (though gold tumbled in New York yesterday) the only relative success story has been gilts: their price has risen as yields have fallen. But government bonds are over-valued; that bubble will burst. And once the effects of inflation are factored in, there is little to celebrate. Of course, those with debt are also seeing its real value cut; low rates have also boosted those with floating rate loans. But the real story for Britain’s asset owners and investor class is that the ongoing process of wealth destruction has further to go. It is time for a brutal reality check.

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