UK household debt has not yet amplified Covid shock – BoE paper

Countries with high levels of household debt tend to suffer deeper recessions, but this did not appear to be the case during the Covid-19 shock in the UK, research by the Bank of England has found.

In a quarterly bulletin article, published today (June 25), Jeremy Franklin et al examine survey data on the effects of debt during the Covid-19 shock. Historically, household debt has tended to amplify shocks by adding pressure to household finances, causing a deeper drop in consumption.

The Covid crisis saw a unique policy response, however. The authors say income support and mortgage payment deferrals appear to have mitigated the usual amplification effect of debt. Survey data shows mortgage borrowers who used the deferral scheme were less likely to cut spending.

However, signs of “financial difficulty” are now rising, especially among borrowers with unsecured debt. The data shows borrowers with only consumer credit reported the highest level of difficulties in the first half of 2021, though a rising share of borrowers with mortgage debt also reported problems.

“Household debt may yet play a bigger role in the Covid crisis,” the authors say. “This will depend on the evolution of the pandemic and the resulting pace of economic recovery, which remain uncertain. It will also depend on how governments, households, businesses and financial markets respond to these developments.”