The COVID-19 outbreak has created a widening wealth divide between those hit by job losses and struggling to make mortgage and rental payments, and those who have retained their jobs and now have more disposable income than they’re used to.
Those who have maintained their income have contributed to a record level of debt repayments. More than £5bn of credit card debt was repaid in April alone, with the newest June 2020 figures from the Bank of England showing total consumer credit repayments, including short term loans (i.e. the kind you get from wonga), overdrafts, credit cards and store cards, totalling £7.4bn. That far outstrips the £300m of debt repayments typically made by British consumers monthly and more than doubles the previous record for a single month.
Renters are more likely to suffer than homeowners
It’s not only the record levels of debt repayments that have revealed deep divisions in the UK economy since the outbreak began. There’s also a big discrepancy in the proportion of homeowners and renters who are struggling financially.
Analysis by the Resolution Foundation found that private renters are more likely to have fallen behind with their housing costs during the crisis than those with a mortgage. The report revealed that one-in-eight renters have struggled to pay for their accommodation over the last three months, compared to just one-in-12 homeowners.
That was mirrored by the employment status of private renters and homeowners, with one-in-five renters being furloughed or having lost their job during the outbreak, compared to one-in-seven mortgage holders.
Plunging retail spending
While the lockdown has brought some benefits for indebted consumers, it has led to devastation for others, both in terms of the financial and the human cost. Retailers have been among the hardest hit of all businesses, with consumer spending falling by 18 percent in April as people stayed indoors.
The declines in April took retail sales back to levels last seen in 2005, with 15 percent of all stores reporting zero turnover for the month. Almost all retailers suffered, with sales of clothing and petrol falling by more than 50 percent. The only upturns were experienced by online operators, with sales surging by 18 percent, and the sale of alcoholic drinks, which rose by 2.3 percent.
Business debts are on the rise
While some consumers have been able to repay large chunks of their short-term debt, the situation is quite different for many businesses. As consumers rein in their spending, businesses are having to borrow more to supplement the steep fall in sales.
Businesses in the UK private sector were forced to take on a further £8.4bn of bank debt in April, which followed a record £30.2bn of borrowing in March. Unfortunately, for many firms, even the easing of the lockdown restrictions will bring little respite, with consumers expected to remain cautious and delay spending decisions until the situation becomes clearer.