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The Effects of Recession and Those Most at Risk

Research Summary, October 2008

Summary: For many people, the reality of a recession will be a complex interrelationship between falling property prices, rising costs and the burden of personal debt. As expected, those most at risk from its economic and social effects are those on low incomes, which may be sub-divided into the likes of the elderly, the disabled and those with young children. Importantly, during a recession, many more people, who under normal circumstances would expect to at least get by, would fall into the at risk category as their circumstances changed, often through no fault of their own.

Falling Standards of Living The Impact of Rising Costs Impact: Until recently, a combination of low prices and easily available credit allowed many people to reduce the proportion of their income spent on food, heating and travel. Rising food, fuel and energy prices means this is no longer the case. However, for many people their financial situation means that the only option is to spend less on the fundamentals as opposed to reducing expenditure elsewhere. At Risk: Those on low incomes, which could include those reliant on welfare, pensions or fixed incomes and also those that are relatively well-paid but unable to cope with rising costs as they are already, in simple terms, mortgaged to the hilt. Notes Relying on Welfare - Unemployed, Elderly, Disabled or with Young Children

All of the above (potentially) spend a higher proportion of their income on food and heating. However, the elderly and disabled are more likely to be reliant on benefits in the long-term and the disabled may have the additional expense of specialised transport and other needs. Most benefits are linked to the Retail Price Index (RPI), and are adjusted only once a year. However, it has been argued that the RPI does not reflect the spending patterns of those dependent on welfare and therefore the annual increase in benefits does not take account of the rise in claimants expenditure. Furthermore, a once a year increase in benefit does not take account of any rapid increase in prices in the interim. This approach also means that increases in inflation have a direct impact on public spending and it has been estimated that Septembers 16-year high in the rate of inflation will add 3 billion to the UKs welfare bill. The elderly and disabled in particular are more likely to suffer from poor diet and live in an inadequately heated home, with all their attendant health problems. They may go out less and become more isolated. If they are worried about money they may also be at risk from taking on debts that they cannot afford. Many young people will have stretched resources to the limit in order to buy a first property and will be poorly placed financially to cope with significant price rises. A change in circumstance, such as unemployment, particularly if it persists, will see them in the ranks, if not of the low income, then of the low disposable income.

In Employment - Young Professionals, Elderly and Disabled

The elderly and disabled, even if not reliant on benefits, are less likely to be in wellpaid employment and therefore will still spend a higher proportion of their income on food, heating and transport. This means they may still face the risks of poor diet, inadequate heating and debt.

Financial Hardship - The Impact of Falling House Prices Impact: As house prices fall and credit becomes much less readily and cheaply available, people will need to learn to live much more within their means or risk further and unsustainable levels of personal debt. However, many people will have stretched resources to (and beyond) the limit in order to buy a first property or to upgrade to a larger one. At Risk: At greatest risk are those on low incomes and/or without assets to borrow against. However, to this can be added those that under normal circumstances would expect to get by but who through changed circumstances, such as unemployment, may suddenly find themselves in the at risk category. This may include first time buyers and those with little or no savings. 1 Notes

It has been estimated that as many as 1.7 million first-time buyers will find themselves in negative equity within a year, from which it could take ten years to recover. Similarly, many in their 30s or 40s may have recently incurred higher debt levels in order to buy a bigger home. More people are at risk of falling into mortgage arrears or having their property repossessed than at any time since 1992. The vast majority of homeowners have no protection in place to guard against financial hardship 2 . Falling house prices also make it more difficult to re-finance existing loans effectively, or to borrow more, even if the monthly payments would be affordable. More people will also find that their homes will not support them when they retire, both in terms of re-mortgage value, perhaps to go on living at home, and sale value, to support living in sheltered housing or a care/nursing home. Living within ones means is becoming harder as salaries stagnate and inflation increases. It has been estimated that a basket of staple family foods has increased by between 20% and 30% over the past year and fuel and utility prices have risen sharply.

Financial Hardship - The Impact of a Falling Stock Market Impact: Investments that rely on a buoyant stock market will become increasingly devalued, a trend that may be exacerbated by rising inflation. At Risk: At greatest risk are those that rely on workplace pensions to sustain them through retirement, and endowment policy holders who may find themselves unable to cover the value of the loan at the end of mortgage term. Notes

Final salary schemes have reduced hugely in value over the past three weeks and many now run at a deficit. Particularly if it becomes a trend, this could encourage employers away from final salary schemes in favour of money purchase schemes.

1 It is worth noting that in 1997, a typical household put around 10% of its income into savings. By 2008 this had shrunk to less than 1%. 2 Only 16% of single-income families with a mortgage have insured their income to make sure they can meet mortgage repayments. According to AXA and the Council of Mortgage Lenders up to 200,000 households are at risk of experiencing mortgage payment difficulties should current trends continue.

These are less generous and transfer the risks associated with investment in stocks and shares onto the employee.

It has been estimated that up to 90% of endowment mortgage policyholders are at risk of not covering the value of their loan at the end of the mortgage term. This is because money paid in to endowment schemes in invested in the stock market, exposing it to fluctuations in share prices. More people will have to eat into their savings and investments in order to cover living expenses. This will be particularly true for pensioners and those living on a fixed income, which may be progressively devalued by any accompanying inflation 3 .

More Family Break Up Impact: Even a mild recession will put more pressure on families and increase the likelihood that more of them will break up. Key Factor: There is a strong link between family break-up and the accumulation of personal debt, often to unsustainable levels. Research with voluntary organisations suggests that many people only recognise this link much further down the line 4 . At Risk: Those on low incomes and/or with no assets to borrow against. This could include those reliant on welfare, pensions or fixed incomes and also those that are relatively well-paid but unable to cope with rising costs as they are already, in simple terms, mortgaged to the hilt. Notes Many of the effects of a broken home are long-term and can easily become endemic both to individual families and whole communities, particularly in deprived areas:

There is a strong link between family break-up and a drift into drug or alcohol abuse and welfare dependency. Women are at particular risk from accumulating yet more debt, as they tend to suffer a greater loss of income through family break-up. It has been shown that children from broken homes are far more likely to fail at school, become drug addicts and have serious debt problems themselves. They are more likely to engage in anti-social, criminal and violent behaviour.

Poorer Health Impact: As people are forced to economise and reduce their outgoings, many find they have little choice but to spend less on the fundamentals of food and heating. Key Factor: For many people debt is a key factor, as they struggle to cope with increasingly unaffordable repayments. But the same would be true for people who, whilst not in debt, simply dont have the financial room for manoeuvre. At Risk: Those on low incomes, particularly the elderly but also those with young children and those with mental health problems. Notes: Again, many of the effects of poverty leading to poor health are long term and may be considered life-shortening. They may also be an additional burden to public services,
3 But as has already been noted, a typical household puts less than 1% of its income into savings. 4 By December 2007 UK personal debt stood at 1,409 billion, a figure that rises by 1m every five minutes. It has been estimated that 7,716 loan repayments go unpaid every day, and that Citizen Advice Bureaus will deal with 6,600 debt problems each day.

which may have to cope with the consequences but at a time when they themselves are likely to be financially stretched.

The elderly and disabled in particular are more likely to suffer from poor diet and live in an inadequately heated home, with all the attendant health problems. They may go out less and become more isolated. If they are worried about money they may also be at risk from taking on debts that they cannot afford. Even if they are not reliant on benefits, they are less likely to be in well-paid employment and therefore will still spend a higher proportion of their income on food, heating and transport, and may still face the risks of poor diet, inadequate heating and debt. 91% of people with personal debt report deterioration in their mental health, notably stress and depression. Conversely, people already with mental health problems are particularly vulnerable to becoming trapped in a cycle of debt of poverty. They are more likely to be on lower incomes, may not be able to manage their finances properly and may be able to obtain credit only from door-step lenders and loan sharks. 50% admit to going without food and/or heating 5 . Children are more likely to be fed a less healthy diet, based on foods with high sugar and additive content, which have already been linked to bad behaviour as well as tiredness, irritability and lack of concentration.

More Crime, Violence and Anti-Social Behaviour Impact: There is a strong link between the background of a broken home and the likelihood to both engage in, and suffer from, criminal and violent activity. Acquisitive crime may also be more likely to increase during a recession. At Risk: Those on low incomes and most likely to accumulate unsustainable levels of personal debt. Those most at risk are more likely to come from broken homes. Notes:

Those most at risk of accumulating unsustainable levels of personal debt are most likely to fall prey to door-step lenders and loan sharks, who often employ violence, threats and intimidation as means to extract payment. Many in the criminal justice system, convicted of violent and/or acquisitive crime, have behind them a history of family break-up, drugs and educational failure. They may make a significant contribution to the 20% increase in violent crime that the Home Office estimates could arise from an economic downturn. There may be an increase in bullying of those unable to afford a new uniform, pair of shoes, school trip, or even the latest fashion or gadget. There may be greater levels of hostility towards the likes of religious or ethnic minorities, learned at home where such groups may be blamed for the familys predicament.

Children

5 Also, research has shown that of those with debt problems, 71% ran out of cash most weeks and 87% relied on credit to pay for food and everyday expenses.

Education - More Children Under-Achieving at School Impact: Poverty can impact on a childs willingness and ability to learn in many ways. It may be particularly significant for those from poorer backgrounds who attend school in an otherwise more affluent area. Significant personal debt may or may not be a factor. During a recession school-based family workers expect to deal with many more issues related to a familys financial situation. At Risk: At greatest risk are those from families on low incomes, who may both suffer from and take part in more bullying, for example. Children from minority groups may also suffer more bullying. Notes:

There may be an increase in bullying of those unable to afford a new uniform, pair of shoes, school trip, or even the latest fashion or gadget. There may be greater levels of hostility towards the likes of religious or ethnic minorities, learned at home where such groups may be blamed for the familys predicament. Children may live in a home where hardship is creating more tension, leading to arguments and perhaps violence. This may be a particular issue where there is a need to fund a drug or alcohol problem. Children are more likely to be fed a less healthy diet, based on foods with high sugar and additive content, which have already been linked to tiredness, irritability, lack of concentration and bad behaviour. Social care and education have traditionally attracted relatively low wages and for some of these workers a recession may necessitate a degree of belt-tightening that could not be maintained over a long period. Employers may therefore need to be prepared for the stresses and strains this would put staff under and for heightened difficulties in the recruitment and retention of staff.

Family Workers

Education Impact of Recession on the HE Sector Impact: It is difficult to judge what effect a recession will have on those in or entering HE as there has not been a recession since the introduction of tuition and top-up fees and therefore how young people and their parents will react is unknown. As far as HE institutions themselves are concerned, they may more closely monitor their mix of courses and may be more willing to close those they consider uneconomic. Key Factor: Financial hardship is likely to be the key factor both for those already in higher education and for those thinking about entering. A funding shortfall, perhaps in conjunction with falling student numbers, will be the most likely factor behind a decision to close a course. At Risk: Probably at greatest risk are those from lower income households but who do not quality for any non-repayable maintenance grants. Notes:

If unemployment rises sharply and more families find themselves in straitened circumstances those already in HE may find support from their parents harder to come by. More students may take time out to earn more money to help complete their course. But keeping temporary jobs may be more difficult if employers are faced with a choice

of simply telling a student they are no longer needed or paying redundancy to a fulltime employee.

Students may increasingly base their choice of degree on the state of the job market, particularly mature students, who more often see their studies in career development terms.

The Social Impact of a Recession Possible Winners and Probable Losers Winners There is a school of thought and evidence - that questions the extent to which people are better off during times of strong economic growth and suggests that in some respects recessions are actually a blessing:

People drink less, smoke less and eat healthier food, cooking at home more and eschewing expensive fatty foods. There is growing demand for public allotments, with more people not just wanting to grow their own food but to sell surplus produce. More people enrol in higher education, particularly young people who feel it will be advantageous to prolong their education. Libraries report an increase in lending. People travel less, either as an economy measure or because they are no longer commuting; the air is cleaner and the number of road traffic accidents reduces. People are less likely to neglect their families, taking more time to visit elderly relatives and looking after children themselves rather than enrolling them in afterschool activities etc. People throw away less food and replace consumer goods, such as televisions, less often. Levels of non-recyclable household waste tend to fall. Prices for necessities tend to level out and then fall. People buy and sell more second hand goods. More people downsize and reduce not only their mortgage but their outgoings in general, giving them the means to do more of the things they want to as opposed to the things they have to. Statistics show that, generally, levels of personal contentment do not fall during a recession. People (and businesses) are encouraged to think and act in more environmentally friendly and sustainable ways, mostly in terms of wasting less food and water, using cars with better fuel consumption and becoming more energy efficient. Many more people lose their homes and their livelihoods. Mortgage repossessions are expected to rise 50% in 2008 6 and it has been estimated that 305 people are being declared bankrupt or insolvent every day. More people indulge in gambling during a recession and bookmakers admit their core customers tend to consist largely of those on low incomes or already in financial trouble. Minority parties, particularly those at the extremes of left and right, expect to do well during a recession, benefiting from disillusionment with the traditional order.

Losers

6 Furthermore, more than 500,000 mortgage holders have missed a payment in the last six months, indicating that more people are starting to struggle.

The Economic Impact of a Recession Possible Winners and Probable Losers Winners It has been argued that a recession has advantageous economic side-effects, both in general terms and in relation to individual sectors of the economy.

It speeds up the process of business evolution, forcing companies to reduce costs and adopt new practices. A slowdown in the property market opens up opportunities for first-time buyers, partly because prices fall in general and partly because the buy-to-let sector contracts, making more properties available 7 . Businesses (and individuals) are more likely to think in terms of greater efficiency. They may, for example, look to switch to renewable sources of energy or insulate their properties. This will provide work for other businesses in this sector.

Losers Manufacturing: The manufacturing sector has declined at a record rate as consumers rein in their spending. Construction companies have been badly hit by deteriorating economic conditions, particularly house builders. Services: Some analysts suggest it will be the service sector (e.g. retail, leisure and financial services) that will suffer the most, noting that it has already suffered its biggest fall in output since 1996. The service sector constitutes 75% of the total economy. Many of the companies most likely to suffer in a recession are those in the middle of their sector, where the sector itself does okay but consumers shift around within it:

Designer stores survive because their clients, the wealthy, are insulated against recession. Most bargain stores survive as many consumers trade down. Those that suffer are the likes of M&S and Debenhams as consumers trade down or hold fire. The same is true in the hotel and restaurant industries, where it is three and four star businesses that are reporting the most significant downturns. Although in a creative sense, the Arts can thrive during a recession, it can suffer as state subsidies are cut, contributions from businesses reduce, backers for projects are harder to find and patrons look to reduce their outgoings.

Public Sector: Cost-cutting in the public sector is also highly likely. Sources report that government departments have been asked for updated plans for job cuts, and that ministers are to draw up plans for a new efficiency drive and have been asked to reduce administrative budgets by 5%.

Bibliography
Note on Sources: Academic work on the effects of a recession have been hard to find and this work has to date relied largely on newspaper and periodical articles, which, given the medias tendency to focus on the worst case scenario, may be taken with at least a slight pinch of salt. That said, many of the articles used do quote expert sources, from finance, industry and academia, and this does lend them a degree of credence.

AXA (2008) More Homeowners at Risk than in 1992 Recession, AXA 27.05.08 Barnes, Daniel (2008) Recession Fears Causing Debt Depression, myfinances.co.uk 12.05.08 Bonnick, Helen (2008) Recession-proof Jobs, in Community Care, 02.10.08

In 2006 only 8% of properties were bought by first-time buyers; now its 13%.

Centre for Social Justice (2007) Breakthrough Britain Ending the Costs of Social Breakdown Conway, Edmund (2005) Recession Fears could hit Families in Daily Mail 07.04.05 DNG Financial Solutions (2008) Professional Briefing: Helping Clients Facing a Recession Sept. 2008 Duncan, Gary (2008) Is this the first Recession in which workers in Service Industries will suffer Most? in The Times 16.10.08 Duncan-Smith, Iain (2008) Things Fall Apart: The Silent but Pernicious Effects of Recession, in The Times 09.10.08 Elliot, Francis (2008) Fresh Storm Gathering as Inflation Surge adds 3 Billion to Welfare Bill in The Times 15.10.08 Gilmore, Grinne, Webster, Philip and Jill Sherman (2008) White Collar Workers next Victims as Unemployment Accelerates in The Times 16.10.08 Heng, Simon (2008) Cheap TVs Cant Help Us, Communitycare.co.uk 16.05.08 Howie, Michael (2008) Rates Cut Likely as Recession Grips Services in The Guardian, 04.10.08 Howson, John (2008) Colleges face up to Recession Fear in Church Times Sept. 2008 Jeffries, Stuart and Moss, Stephen (2008) Who wants a Recession in The Guardian, 08.02.08 MacDonald, Calum (2008) Impact of Recession can strike at every Lifestyle in The Herald 23.01.08 Macwhirter, Iain (2008) How to Survive the Recession in The New Statesman, 21.08.08 Monaghan, Gabrielle (2008) Scramble for allotment plots as veg growing booms in The Times 12.10.08 Ruhm, Christopher (2000) Are Recessions good for your Health? University of North Carolina, in Thomson, Alice (2008) Why the Recession is a Blessing in Disguise, in The Times 10.10.08 Stuttaford, Dr. Thomas (2008) Is the Credit Crunch Bad for Your Health? In Healthspan 2008 Thomson, Alice (2008) Why the Recession is a Blessing in Disguise, in The Times 10.10.08 Turner, Janice (2008) Lets hope our mad gambling session is over in The Times 16.10.08