Can consumers really lead the economy out of recession?

The better-off have seen savings soar, but poor households are often struggling with debt

Stefan Wagstyl 

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Like many people, I received an email from Barclaycard last month headed: “We’re updating your T&Cs”. 

Like many people, I ignored it. I don’t normally have problems with Barclaycard and didn’t want to spend any time thinking about it.

But it turns out that this email was more important than I thought. 

When I eventually opened it four weeks later, I learnt that from January, Barclaycard is jacking up the minimum payment from 2.5 per cent of the balance to 3 per cent.

This may not sound like much if you pay your bill in full every month, as I do. 

But it’s a 20 per cent increase. 

As the email helpfully explained, on a £2,500 balance the payment would be £81.94 instead of £62.19. 

For a low-income person struggling to pay down debt while simultaneously covering everyday essentials, it could make a difference. 

Remember that the government’s temporary pandemic uplift in universal credit is just £20 a week.

In principle, it’s good to see credit providers raising minimum payments on expensive consumer debt. Barclaycard’s annual compound rate is 19.4 per cent. The quicker borrowers pay off their debts, the less interest they will pay.

But, with the economy in recession, unemployment mounting and government financial support schemes due to expire in March, it’s a tough time for tough love.

To be fair, Barclaycard is excluding vulnerable borrowers who have taken a payment break and is inviting other clients with concerns to get in touch. 

The company and other credit providers are responding to pressure from the Financial Conduct Authority, the regulator, to deal with persistent debt, which poorer customers often struggle with, sometimes for years. 

On top of this, they are reducing some customers’ credit limits in response to the Covid shock, as they informed customers earlier in the year. 

But the timing could have been better. As Sara Williams, author of the Debt Camel financial blog, says: “Higher minimums make people repay debt quicker, which is good. 

But January is the worst month to do this with Christmas bills to pay. And I think many people won't have read the email, so this may come as a nasty surprise.”

All this is a useful reminder of how precarious are many people’s household finances as we try to look forward to economic recovery. The government is relying heavily on a consumer-led surge once the vaccine rollout gathers pace. 

Bullish fund managers are betting on it. 

As Simon Webber of Schroders told last week’s FT Money investment panel, there is “a lot of pent-up demand”.

Shares in high street retailers, restaurant chains and airlines are among those touted for recovery on the stock market.

The argument is that people in work and those on furlough with topped-up pay packets have survived the pandemic in good financial form. 

Even when incomes have slipped a bit, spending has fallen by more, especially on going out and holidays, allowing people to save and pay off debt. 

Overall, the average household is set to save 19 per cent of income this year, up from 7 per cent in 2019, according to the Centre for Economics and Business Research, a think-tank. That is £7,100 per household.

But that’s not the whole story. 

In a speech this month, Michael Saunders, a member of the Bank of England’s monetary policy committee, cited an Ipsos/Mori poll showing the gain is concentrated among the well-off — households with annual income of £55,000 and more. The average household is seeing savings fall, not increase, and the poorest are falling into debt.

Mr Saunders said: “Slightly more than 25 per cent of households report financial strains over the last year (such as falling behind on rent, mortgage payments or utility bills). 

Moreover, survey evidence suggests that among the households that increased saving, most plan to keep those savings rather than spend them.”

Now it’s the job of a central bank to be cautious. But there is much to be cautious about. 

We don’t know when lockdown policies will end, how fast vaccines will be administered, or how far unemployment — 4.9 per cent at the end of October — will grow, with the end of furlough looming large.

And then we have Brexit. Even those who predict it will somehow rejuvenate the economy are not forecasting rapid results. Mr Saunders was surely right when he said the risks were “tilted on the side of a relatively slow recovery”.

None of this precludes bouncebacks in demand among high earners. Mayfair restaurants, country house hotels and luxury cars may all see surging sales. Shares in the relevant companies may rally on the stock market.

But such a recovery may not reach those on lower and or less predictable earnings: not just staff in the battered hospitality trade but a host of freelance and self-employed workers, who have often had the least access to pandemic support schemes. 

Frequently, they are younger people in sectors where older colleagues on permanent contracts have been better protected.

Ministers will doubtless be telling us next year to go forth and spend. But they should take care that this doesn’t lead people into precisely the kind of persistent debt that the FCA is seeking to suppress. 

It’s no use Barclaycard raising its minimum payment if the government throws caution to the wind.

Stefan Wagstyl is editor of FT Money and FT Wealth

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