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29 December 2020
2020 has proved a challenging year for all of us.
Borrowing has risen unsustainably during the pandemic among businesses, the government and consumers. Yet, as we look forward to 2021, there is much to be hopeful for. With a successful vaccine rollout, much of normal life will return and the economy can recover quickly.
So how will the economy recover? Can we learn any lessons from past recessions?
We caught up with Nick Georgiades to hear his reflections on the subject.
In that period of time, when the market started to crash we a saw rapid rise in unemployment, but actually it was a headline rate of around 5% and it went up to a peak of 8% which is roughly double the headline rate.
It was a financial crisis and part of the relief package was monetary action to add spend into the economy, reducing the interest rate, so ever since that period of time we've seen really low interest rates, which was originally intended to be a temporary stimulus.
Instead, the UK interest rate has never returned to a ‘normal’ level so there is a large part of the population that have never experienced anything other than these unusually low interest rates.
These days, we talk about the 2008 Global Financial Crisis as a severe recession but if you go back to the 1992 recession the situation was much more dramatic. In that time, I was responsible for the loss provisioning in mortgage portfolio of Alliance & Leicester so I saw first-hand how people were hit really hard.
In that time you had unemployment rates over 10% and the interest rate was reduced to 6% and if you go even further back to the recession periods of the 1980s we experienced unemployment of 12% and interest rates in excess of 14%.
So we've seen these situations before and the unrest and uncertainty and pain it causes to individuals and we are undoubtedly going to see some of that again in the future.
I think certainly we are going to see quite a severe economic shock; we are also undoubtedly going to witness a sharp increase in unemployment.
However, I think that there are also many differences. For example, while the financial crisis was largely contained to the financial services sector the Covid-19 pandemic has impacted pretty much the entire economy – all people and all sectors – and we are currently not seeing that due to government support and intervention which can’t last forever.
The big question now is at what point do we start releasing some of that support and how quickly can we do that in order to return the economy to growth.
First of all, we need to look at what is going to happen to people within the economy.
What we know is that as government support expires, unemployment is likely to rise and so we are going to see a number newly unemployed people.
Within that headline figure we will see people newly unemployed that have never experienced this before, and we are all going to know people in that situation.
For those that have never had to make significant lifestyle changes before, it’s going to take time to adjust so we will probably see many stories of individual hardship as a result of the Covid-19 pandemic.
Secondly, we know that many organisations and institutions are going to be impacted by the ongoing economic crisis. We will see that in the form of bad debt where you have financially challenged organisations chasing financially challenged people.
The solution to that is simple in theory but difficult in practice.
People that can’t pay should be receiving as much support as possible from the government but also from the organisation in the form of forbearance and referral to debt advice.
People that can pay, but choose not to pay, should be pursued through litigation and enforcement as otherwise we will see repercussions for organisations that have extended credit in the form of higher prices, job losses or insolvencies.
I don't think we'll ever been in a time where you will have such a large amount and variety of people that need support.
Historically, organisations would be able to look at credit scores to determine creditworthiness but will now struggle to do that. As jobs disappear overnight, many people with historically good credit scores will struggle to repay their debts so organisations will need to work harder to understand their customer’s circumstances.
On top of that, there's going to be a lot of work due to the sheer amount of debt involved which creates its own problems in terms of capacity. The capacity problem refers to the amount of additional workload the industry will need to perform to deal with the situation we find ourselves in.
There are a few elements to this:
Firstly, organisations need to managing processes so that there is additional capacity in the right areas.
Secondly, we also need to provide the ability for people to self-serve, especially if it’s their first time in debt and they are embarrassed about it, due to the stigma surrounding debt which persists in our society.
Actually, a recent study suggests that people are more likely to talk about mental health issues than debt issues.
If we can encourage open and honest conversations about debt we can take away so of this stigma and help people get back on their own feet, but that’s going to require a great deal of work from the industry and also from the third sector as well.
Read more about 2021 in our recent Talk Radio Interview with Jamie Waller