Pandemic hits income of UK households harder than in France and Germany

British households take on more debt to cope financially

A third of UK households slashed their spending during the crisis to offset the hit to their living standards. Getty Images

British households have suffered a more severe income shock during the pandemic than their counterparts in France and Germany, a new study from a UK think tank showed.

People in Britain also took on more debt after job losses than residents in the two European countries, the Resolution Foundation's After Shocks report in conjunction with JP Morgan Chase found.

Meanwhile, a third of UK households slashed their spending to offset the hit to their living standards and lack of savings.

Maja Gustafsson, economist at the Resolution Foundation, said typical households across the UK, France and Germany had broadly the same income levels in the run-up to the Covid-19 crisis at €33,800 ($40,740) in France, €33,900 in the UK and €34,400 in Germany.

“Beneath this similarity lie big differences in households’ financial resilience, with UK households having fewer savings to draw down, and a far less generous benefit system to protect them in hard times,” Ms Gustafsson said.

“These holes in UK households’ financial resilience have been exposed during the Covid-19 crisis. They are far more likely to have suffered a major living standards hit than French and German households, and are far more likely to have taken on debt to cope with these financial shocks.”

Briton's economy was badly affected by the pandemic, with economic outfall contracting by almost 10 per cent last year after soaring numbers of infections led to tighter restrictions to contain the spread of Covid-19.

While unemployment rose to 5.1 per cent in the three months ending in December, it dropped to 4.9 per cent in February this year as UK Finance Minister Rishi Sunak's furlough scheme, which has supported 11.2 million jobs during the crisis, helped to prevent the figure from escalating.

The Resolution Foundation said before the crisis started, the UK’s poorest households earned 20 per cent less than those in a similar position in France, while the Britain’s social security and private savings safety nets were far weaker than both France and Germany.

While UK households were as likely as those in France to suffer job losses, they went on to experience a far bigger hit to their living standards.

Among households where at least one person lost their job, 41 per cent of those in the UK suffered a severe drop in income of at least 25 per cent, twice the level in France and much higher than in Germany.

Once the economic shock from the pandemic was recognised, a third of UK households reined in their spending, far higher than the 23 per cent in France and 21 per cent in Germany that cut back expenditure.

In turn, UK households were far more likely to struggle to cover their housing and living expenses and twice as likely to take on more debt to cope financially, at 17 per cent against 9 per cent in Germany and 8 per cent in France.

The pandemic has affected UK incomes unevenly with poorer households, women and the young most likely to have suffered job loss during the pandemic.

Despite 2020 being Britain's worst economic performance in 300 years, the world's sixth-largest economy is projected to grow 5.3 per cent in 2021, the International Monetary Fund said, due in part to a highly successful vaccination programme.
The Bank of England estimate that £150 billion of excess savings by those still in work who've had few opportunities to spend because of lockdowns would help drive growth.

BoE chief economist Andy Haldane said that a “rip-roaring recovery” was possible even if only a fraction of the excess cash was spent.

The Resolution Foundation urged the country’s policymakers not to be distracted from households’ relatively weak financial resilience, which has left them much more exposed to the economic crisis than their French and German counterparts.

While the UK’s vaccination programme has been far more successful than France or Germany’s, the organisation warned that the uneven effects of the pandemic on Britain’s household finances were likely to last far longer than the pandemic itself.

The think tank said a greater proportion of lowest-income households were drawing on savings or taking on debt to support living standards compared to the highest-income households.

“Strengthening households’ financial position, particularly among low-income households, through higher savings, less reliance on debt and a benefit system providing more income protection if they fall on hard times, should be a priority as we emerge out of the current crisis,” the Resolution Foundation said.

More on the UK economy