If you have been worried about reducing your debt and putting off large expenses to build a savings buffer against any unexpected events don’t worry, you’re not alone.
Many households have taken similar actions, and even in the boardrooms of large companies there has been a reluctance to make big decisions, as there has been an expectation people were just going to stop spending.
It hasn’t happened, and Reserve Bank of Australia governor, Phillip Lowe, recently offered an explanation.
During a speech in early February Lowe noted that economies globally have become less inflation prone and capable of achieving and maintaining low unemployment, which is a good thing.
It means Lowe and the RBA board feel less pressure to raise interest rates. While that is generally a good thing it does mean households that want to grow their wealth will have to take a greater interest in the investment options that may be available to them, and think beyond just savings accounts and term deposits.
It is also unclear how great an impact COVID-19 may have on slowing China and even Asia’s growth this year. In March both the US Federal Reserve and Australia's Reserve Bank cut interest rates to counter negative effects of the virus. While it remains a fluid situation the impacts will eventually be washed from the system once the virus is contained and waning.
Virus aside - the reason that Lowe believes economies have reached a ‘new normal’ comes from two trends, trade globalisation and technology.
Globalisation has increased competition, meaning that countries shift towards whatever their natural competitive advantage is and carve out a spot in the global economy.
Technology is not as easily pidgeon-holed. Technology brings about structural unemployment by replacing the need for tasks previously performed by humans, but in return opens up new industries to absorb unemployment.
That creates two issues, the first is how to shift working populations towards continuous training so they can adapt to change brought about by technology, and the second is the creation of uncertainty – that is the uncertainty of how technology will impact people’s lives.
The latter is something Lowe is thinking about, because when people are uncertain they become cautious.
To maintain a strong economy Lowe needs people out buying goods and services. If we are in a ‘new normal’ people will adjust over time to an expectation for the continuation of low inflation and interest rates, more gradual pay rises and economic growth.
And it also means regulators like the RBA need to adjust their strategies. Not long ago it would have been correct to say central banks around the world were eager to raise interest rates and return to what was considered a more normal level of interest rates and inflation.
The US Federal Reserve made an attempt in 2018 when it started to raise interest rates. The impact nearly derailed growth in the US economy and the Fed had to retreat and bring interest rates back down.
Just as workers may have to maintain patience for pay increases the people running the country may be equally constrained in how they make economic adjustments.
In the meantime, technology will continue to throw up curve balls and be a source of, hopefully, positive transformation but also uncertainty.
In a low interest rate environment what should I do?
- Check the interest rate on your savings account. We know too many people are sitting in accounts that pay zero per cent. Shift funds to an account that pays you interest.
- Think about long term goals and how you can achieve those goals. Outside of a term deposit or savings account what other investments may you be comfortable with? There are a lot more options that carry less risk than just shares and property.
- As you examine other investment options you may come across new terms. Set aside some time to do a bit of research and become comfortable with what’s on offer. Some terms you may come across could include Corporate Bonds, Structured Investments and Foreign Exchange.
- As you do your research you will come across the term ‘diversification’. Understanding diversification is an important part of your wealth journey, add it to your list of things to learn about.
May sure any advice you receive is coming from people that are aligned with your goals and have knowledge of the topic.
Damon is the content editor for Citi
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