A second dip with a second wave? Prospects for consumer credit as the economic recovery stalls

It’s feeling increasingly likely we will look back at the summer of 2020 as an economic false dawn, as the Covid pandemic rears its head again on our way towards winter. Those initial months of national lockdown, clapping for the NHS and rainbows in windows, seem quite long ago now. Instead, there is a fractious, uncertain atmosphere both politically and economically since the dark nights began to creep in. There’s no doubt that the colder weather affects everyone’s mood, but this seems to have coincided with a fall in optimism about finally recovering from the Covid crisis.

Chancellor Rishi Sunak’s July mini-budget and the ‘eat-out-to-help-out’ boosterism of August came with a sense that maybe things could get back to normality. But as schools returned and university students went into halls of residence, gradually increasing infection rates meant gradually reimposed restrictions – the ‘rule of six’, and now local restrictions categorised into three tiers of severity.

The economic data seems to bear out these dashed hopes; GDP grew by 2.1% in August, not maintaining the ‘V’ shaped bounce back many were hoping for – and leaving the UK still 9.2% below output levels of February 2020. The Bank of England Governor also poured cold water on those who might expect growth to be maintained, suggesting that output at the end of Q3 will still be 10% lower than at the end of 2019 – a view shared in the latest Reuters poll of economists.

This isn’t a trend limited just to the UK; a similar pattern is occurring across the developed world and in the eurozone. September’s HIS Markit PMI report for European economies showed a contraction in activity and stresses are being felt in welfare support schemes especially where infection rates have been returning sharply.

The true, underlying condition of the economy is clouded by the sheer scale of Government interventions since the start of the pandemic. Furlough, payment deferrals and enforcement bans have suspended the normal operations of the market – to the extend that, for some, net incomes were higher than might otherwise have been the case. For four months the Bank of England reported that debt repayment levels exceeded new borrowing, and the savings ratio increased sharply.

But at the end of October, with the formal end of the payment deferrals period and the phasing out of the main furlough programme, there is a sense that reality will begin to bite. This seems also reflected in recent consumer confidence surveys, with Bank of America data suggested UK customer sentiment has returned to the low depths last seen at the end of March.

This isn’t an entirely emotional reaction to events. ONS data shows that redundancies are sharply higher in recent months. And though Government’s income replacement schemes will no longer apply as generously, the Chancellor’s reforms to his initial Job Support Scheme may help to cushion the blow for some. Nevertheless, many will fall through the cracks between these support programmes and Universal Credit, welcome though it may be, is a poor substitute for real earnings.

So it is entirely possible that we are on the cusp of a ‘double dip’ recession, not in any way as sharp as the fall experienced from March, but a long way from the optimistic ‘V’ shape a few economists were hoping for.

It’s not that there haven’t been some signs of normality returning during the summer. Credit card spending did revert to traditional levels in late summer – though not yet above 2019 volumes, according to the latest FICO UK credit card market report. But the lag between official data and real time experience is quite obvious, and with Wales going into a ‘fire break’ fuller lockdown and many other parts of the UK looking to be heading in a similar direction, it is hard to see how even August and September’s level of performance can be maintained.

There are signs that the Government is hesitating from its ‘phased return to normality’ aspirations. This week’s statement from the Chancellor showed a responsiveness to weaker economic news and the cancellation of his scheduled November Budget and spending review was no surprise. It feels highly probably we will see repeat Commons statements from the Chancellor in November, December and in January – each time tweaking job and business support schemes to match the economic weather.

Even with these state interventions, consumers are likely to feel increased financial stress as businesses recalibrate their operations to the new realities. When incomes dwindle, recovering sums owed is obviously harder. So the collections market is likely to see a higher volume of debt impairment while simultaneously a greater number of customers in financial distress and vulnerability.

The CSA has set out a new series of key considerations for the collections sector to bear in mind as we move towards the winter months. Supporting customers and showing awareness of regional and local restrictions should go hand in hand with a proactive approach to contacting those who have taken up options for payment deferral so far. It remains the case that, if customers can afford to make some repayments, it is usually in their best interests to do so; further forbearance offered to customers after the end of October will be reflected on credit files. Nevertheless, there is support available and lenders are successfully signposting those in need of help to professional and independent debt advice.

As we head towards a difficult economic winter, the Government will constantly review the level of direct assistance it can provide. In the meantime, every effort should be made to encourage dialogue between lenders and customers, because open communication and sharing information about changed circumstances at an early stage is almost always the best route to resolving problems before they escalate.

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