Covid-19· Incomes· Labour market· Pensions & savings After shocks Financial resilience before and during the Covid-19 crisis 21 April 2021 Maja Gustafsson Kathleen Henehan Fahmida Rahman Daniel Tomlinson This report provides some of the first evidence on how the impact of the Covid-19 crisis on households has differed across countries. It studies the living standards-related factors that contribute to financial resilience (or the lack of it) both before and during Covid-19 in the UK, France and Germany. Overall, we find that pre-crisis vulnerabilities were large, especially in the UK and for lower income households in Germany. We conclude that across all three countries, the impact of the crisis will last via its effects on savings and debt. Going from here, the task for policy makers task is to respond to the specific impacts of the crisis, without losing sight of the longer-term trends and problems that needed action long before the pandemic. Below, we follow the structure of the report to summarise the findings for each of the factors of financial resilience we investigate. Incomes and the labour market Typical working-age household incomes across the UK, France and Germany were broadly similar, pre-pandemic but income inequality was greatest in the UK. This meant that the typical household income (before housing costs) in the lowest income quintile of working-age households was 20 per cent lower in the UK than in France before Covid-19. Going into the crisis, France faced the challenge of relatively low employment. Germany and the UK had relatively high employment rates but each had separate challenges. Low hourly pay, fewer hours worked and less generous support for those out of work in the UK contributed to low incomes. In Germany incomes were relatively high, but a key problem was instead the high proportions of workless households in the bottom-income quintile. In the crisis, a smaller share in Germany experienced a negative employment change (being furloughed, experiencing lower-than-usual pay or moving out of work) compared to the size of impact in the UK and France. The main difference between France and the UK is that a labour market shock was less likely to contribute to an income fall in France than in the UK. 41 per cent of households in the UK who experienced a job loss also experienced reduction in household income of a quarter or more, compared to just 20 per cent in France. Spending and housing We find that pre-Covid-19, housing costs were highest relative to income in the UK’s private rented sector. But that the large share of private renters in Germany means that housing costs are on average higher in Germany than in the UK – this holds true across the income distribution. On the eve of the pandemic, UK households allocated a larger proportion of their income to spending. Within this, UK households spend less on essentials such as food and housing than those in France and Germany. Turning to household spending during Covid-19, our survey finds that 33 per cent of respondent households in the UK, 23 per cent in France and 21 per cent in Germany reported spending less in January 2021 than they did before the pandemic. This will be driven both by falls in incomes and by restrictions to social consumption. Savings and debts Before the crisis, households in Great Britain were less likely to have savings equivalent to up to one month’s disposable income than households in France and Germany, and had a lower saving rate, on average, than counterparts in France and Germany. UK households were also more likely to enter the crisis with some non-mortgage financial debt than those in France and Germany. Two-thirds of middle-income households had non-mortgage financial debts in the UK, but only 40 per cent in France and 43 per cent in Germany. These pre-pandemic differences have been reflected in the approaches households have taken to deal with an income shock during the crisis. Households in France that experienced reduced incomes were slightly more likely to draw down savings than households in a similar position in the UK or Germany. Further, during the crisis, more UK respondent households report taking on debt to cover day-to-day costs. The share of respondents with an income fall who report that they have taken on debt in order to cover living expenses is significantly higher in the UK (17 per cent) compared to both Germany (9 per cent) and France (8 per cent).