At every point in time there are potential dangers in the financial world. Today is no different and perhaps the major threat to your personal wealth goals at the present time is the prospect of a US interest rate rise. That’s because it has the potential to strengthen the dollar, strangle the US economic recovery and send the world into a recession.
Interest rates
However, with the world’s largest economy performing relatively well and delivering jobs growth, GDP growth and high consumer goods sales growth, it appears to be the right time to begin the long process of tightening up monetary policy. As such, the Federal Reserve has been attempting to warn investors and markets that interest rises are coming, with Janet Yellen going to great lengths to reassure the rest of the world that the tightening of monetary policy is likely to take place at a relatively slow pace.
Therefore, it may seem as though there is little to worry about. Interest rates cannot remain near-zero in perpetuity and were only ever so low as a result of the global financial crisis. While true, it does not change the fact that the world is about to move into a very different era than has been the case in the last handful of years, with the cost of borrowing set to rise, the opportunity cost of saving set to fall and the potential for an economic slowdown being a real one.
China
Of course, the Chinese economy is another risk to your financial future. Its ability to grow at a double-digit rate may now be gone and the transition from being a capital expenditure-led to a consumer-led economy could prove to be a painful one. As has been evident in the last year, commodity prices have fallen and this has exacerbated deflationary pressures. Further moves in this direction could lead to a sustained period of deflation which may cause consumer spending to fall and be the catalyst for a worldwide recession.
Clearly, China still has huge growth potential and 7% GDP increases per annum remain more than double achieved by even the best of its western peers. Confidence, though, may ebb away if China’s growth rate falls further, which is likely to dampen enthusiasm for borrowing, investing and lending across the globe.
EU Referendum
The third major financial risk facing individuals in the UK is the EU referendum. This has been a somewhat secondary news item of late, with the change in Labour leadership dominating headlines. However, it is likely to gain much more prevalent coverage in 2016 as the prospect of the UK leaving the EU becomes a very real one.
While it is difficult to say whether leaving or staying in would be better for the UK, uncertainty is never a good thing for any economy. As such, it would be of little surprise for companies to hold back on all but the most necessary of investment and capital expenditure until they know the result of the vote. This could act as a brake on the UK’s economic performance and cause a hiccup for your financial future.