Aug 2020 | Credit Decisions
By Posted by Experian

What has changed in the economy in the last few weeks

The news of recent weeks suggests the economy is starting to grow. As the UK starts to emerge out of lockdown, and businesses start to reopen, growth is expected.

But, while growth is starting to emerge in small segments, the rate of growth isn’t in line with what was expected. The expectation was we would see a growth rate of around 4% – at this point we are seeing levels less than half of that; sitting at 1.8%. Retail sales, however, have bounced back strongly. In the last two months we are almost back to pre-covid levels for retail sales.

Consumers are starting to spend, with footfall increasing. On Friday 17 July, for example, overall footfall rose to two-thirds of the levels we saw on the same day a year ago and was the highest since lockdown began. The question is whether this will be sustainable, and this is something we are continuing to track.

What does this lag mean, and when will it align?

We believe this is the first leg of our forecast delayed V shaped scenario. From this point it’s expected that the debt burden that businesses have acquired to see them through the most acute phase of the crisis (plus the unravelling of unemployment), will push down on the recovery pace.

The expiry of forbearance measures, such as emergency payment holidays, will also start to materialise into trends such as defaults. We are seeing some indicative signs of this already.

What should lenders be vigilant of?

Employment is weakening. Official unemployment levels remain stagnant at around 4%, but the real figure sits closer to 6%. The difference is due to people out of work, and not currently looking for work compared to the previous quarter. Therefore, this cohort are not being classified as unemployed through the traditional method used by the ONS.

Over the coming months we will start to see people come out of inactivity – start applying for jobs – and be classified as unemployed. As such we will see an increase in unemployment levels.

How will this underestimation impact loss provisions?

By underestimating unemployment, there is a risk of underestimating credit provision. If firms’ use just the ONS figures, they could be excluding over a million consumers from their loss calculations, and therefore not basing their scenarios off an accurate figure of likely loss.

We feel job losses, alongside unemployment rates, will be strongly related to losses. In our models, we consider broader factors to ensure any gap is minimised, if not entirely closed. Looking at both factors, alongside analysis on other additional data – such as Payroll data – will give a more granular view. We are actively working with many lenders in order to understand the true portfolio impact.

What other economic factors, outside of unemployment, should be carefully monitored?

Much of the economic outlook centers around employment trends. 80% of the population receive income from a salary, so any change to their employment will have a knock-on effect on other economic factors – including earnings. Reduced earnings mean less spending, and GDP will be affected – it’s all connected, but in this crisis, we do have a clear driver of risk – of which is unemployment trends.

Of course, one unpredictable factor is the virus itself, if we see a second wave, then this will shift the trends once more. While not something we can model against, it is something we test in our models so we can identify the stress potential should the economy be impacted by a further lockdown.

What does income and expenditure look like?

Right now, we can see that income shock is starting to take hold. We are seeing a decline of 1.5% in real-earnings and expect it to continue to fall.

34% of Britain’s 27.9 million employees have currently been placed on furlough. In our assumptions we expect 10% of the furlough population to lose their employment, this will also contribute towards income shock – a trend we are already seeing come through in the data. In further models we can see additional impact scenarios:

  1. If 10% of the emergency payment holiday population default, the impact will be 80% greater than what we saw in the 2008 crisis.
  2. If 20% defaults, then the impact will be 200% greater

Understanding income and expenditure is not new, but in order to mitigate this risk, and help customers sustain their financial commitments – whether it be extended forbearance, or personalised plans – is even more crucial now.

Another scenario is seen when we model with furlough data. By doing this we can start to see emerging risks. If 10% of those on furlough became unemployed, then the impact across the UK would vary. Our central case has 10% of job losses will come from the furlough population. By modelling this you can start to see the impacts play out on a regional, and local level.

Is this a country wide impact, or are certain areas impacted greater?

While the UK economy is poised to return to growth as lockdown restrictions ease, growth patterns across the UK will be uneven, and the next three years will be inconsistent regionally too. Our calculations show:

  • The South West, East Midlands and Scotland to be most impacted by Covid-19 in 2020.
  • In 2021, the UK unemployment rates in is likely to plateau, but this will not be uniform across the UK and is underpinned by the different sector recoveries. The South West will still feel the struggle of lagging sectors.
  • In 2022, labour market improvements gain momentum. Some notable gains for the likes of South West, while trends in the North East will be slower.

Longer term growth is set to resume more familiar growth patterns, although even still, pockets of risk and opportunity outside the usual regional growth trends, will emerge.

In order to understand trends granular analysis that considers regional and individuals is imperative. As I have just stated, Scotland through 2020, doesn’t have much resilience, but Edinburgh is set to perform well. Trends such as this emphasise the importance of understanding all layers of data.

Focussing on individuals, are there any specific demographics most impacted?

The lowest income groups have seen the greatest hit to earnings. The younger groups, however, aren’t the groups hardest hit by incomes. They have been supported by the welfare system.

The households struggling most with paying bills are not in the lowest groups, but the second lowest groups. When you analyse using Financial Strategy Segments (FSS), there is some resilience in the household sector.

How do you determine risk from opportunity right now?

There are areas of the economy at risk, but also areas which will grow faster with others. We have modelled this through the creation of our confidence index.

Each indicator is ranked amongst local areas and transformed to a specified exponential distribution to generate a score for each area. These scores derived from six indicators are combined using appropriate weighting to form an overall local confidence index.

Within our index we can map regions and local areas against risk, or opportunity. Areas within the Greater South East dominates the top ranks, while parts of the South West languish at the bottom of the spectrum. Of the UK’s largest cities, Birmingham’s performance is the weakest.