Global economies have been decimated by the COVID-19 pandemic. The result of this has been the worst economic downturn since the Second World War and a great deal of economic instability and further knock-on effects.
It is crucial also to consider the effects this has had on household incomes and their use of credit in a world that is now distinctly split into pre- and post-COVID eras.
Household Debt During The Pandemic
In the first several months of the COVID-19 pandemic, starting in March 2020, business and household income experienced quick and severe shocks. Within three months, unemployment rates increased and household retail spending was significantly reduced.
Looking back to the end of July 2020, 13% (6.6 million) of adults were forced to turn to credit or take loans more frequently than usual, and by the end of December 2020, this number had risen to 17.4% (8.8 million). This was especially noticeable among low-income earners and people on furlough who had lost their jobs or had their working hours and income reduced, with 21% using their credit cards more frequently than normal. Many lower-income individuals and families were forced to use a credit card, an overdraft, or borrow money to pay for food or other essential bills.
Further data revealed that over 3.7 million households had a payment holiday arrangement, either making lower payments or taking a full repayment holiday on credit cards and council tax. Lenders have provided over 1.2 million mortgage payment holidays alone, for example.
However, in light of this increased credit spending during the COVID-19 pandemic, many UK households were successfully able to cut back on their expenditures by an average of £109.10 each week (ONS). Households spent less on products and services in the year leading up to March 2021 when they were often prohibited from spreading due to strict national lockdowns.
This led to outstanding credit card balances falling by 12.6% in the year to May 2021, as consumers paid down short-term debts as many households used their accumulated savings and Government support funds to pay off balances on credit cards and loans.
Changes in the Labour Market
The UK enacted its first lockdown in a bid to control COVID-19 more than two years ago with the UK labour market experiencing a sudden and sharp impact as a result. Millions of workers were forced to work remotely and many businesses, such as shops, pubs, restaurants and entertainment venues were required to temporarily shut down triggering the worst redundancy crisis since 2008/2009. The number of people seeking unemployment-related benefits increased significantly from 1.6 million in March 2020 to 2.8 million just two months later, irrespective of the Coronavirus Job Retention Scheme.
Businesses are now facing a vastly reduced workforce with older employees having left the labour market and many others changing careers completely, and a decreased supply of low-skilled EU workers making recruitment more difficult across the board – with the term the ‘Great Resignation’ coined to highlight this. The UK labour market has, in general, withstood the COVID-19 storm. The most current data on the labour market reveals a sluggish rebound after a protracted period of improvement. Although the labour market has proven to be more robust than many experts had anticipated in the early months of the pandemic, imbalances now exist between labour demand and supply, most notably seen in the leisure and hospitality industries, which are seeing increased tightness and a slower recovery.
Post-lockdown Spending and Credit Use
Due to lockdowns and other public health restrictions, household expenditure decreased by 22.2% during the first two quarters of the Covid-19 outbreak. This had a significant impact on “social spending,” such as travelling, eating out at restaurants and bars, enjoying outdoor activities, and engaging in cultural events. As a result, many were able to store up a reserve of cash and savings with nowhere to spend their money.
In the quarter that followed, household expenditure increased sharply by 19.6% as lockdowns eased and businesses began to open, and two years after the Coronavirus pandemic began, it had almost reached pre-pandemic levels. Government programmes like the Self-Employed Income Support Scheme and the Coronavirus Job Retention Scheme meant that household finances had been shielded since the beginning of the pandemic, allowing many to maintain their usual level of spending.
However, according to new data from global analytics software company FICO, the average spend on UK credit cards grew to £711 in August 2021, up £23 from the previous month. This was fuelled by a mass spending spree on travel, holidays and social activities as more and more people began to revert to normal life and found the surplus cash they had available previously had dwindled.
Spending on credit cards exceeded pre-pandemic levels for the third month in a row, with an increase of £40 on average compared to August 2019. Additionally, since January 2021, average credit card sales increased by 25%.
Today, the rising cost of living is further driving a significant increase in credit card reliance as people look to protect their lifestyles from the surge in inflation and to pay mounting bills and more expensive energy costs, petrol prices and groceries.
Where are we now?
Households have since borrowed £1.9 billion in February 2022 alone, roughly £900 million more than the 12-month pre-pandemic trend. This large increase in consumer borrowing likely represents households trying desperately to sustain their lifestyles while real purchasing power is falling sharply.
Furthermore, as the cost-of-living crisis depletes consumers’ lockdown savings, credit card debt is piling up, and higher interest rates are being imposed on an increasing number of consumer loans. According to the Bank of England’s Money and Credit Report in June, credit card debt is increasing at an annual rate of 12.5%, which is the quickest rate seen since November 2005. Borrowing is increasing at a 6.5% annual rate across all consumer loans, which is the fastest rate since May 2019.
According to an ONS survey, 17% of adults said they had to borrow additional funds or access more credit compared to a year ago to pay for rising food and energy costs, wiping out their entire savings in the process.
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