Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown: “The worst of the squeeze may be over, but the pain of rising prices will endure throughout 2023, and for lower earners, young people and singletons, it’s going to be agonising. Millions of people are already running on empty, and the Barometer shows there are still miles to go.
The past six months has taken a toll on our resilience across the board – from savings to debt, with the overall average Barometer score out of 100 dropping from 63.7 to 60.5. This is still higher than before the pandemic (58.8), but we’ve lost three fifths of the boost we got from things like lockdown savings.
The good news is that we may be past the peak. The number of people struggling with rising prices hit almost two in five at the end of 2022, and this is expected to gradually fall back to just under a quarter at the end of this year.
However, we’ll still face horrible pressures through the rest of the year, because wages aren’t likely to make up the ground they lost in 2022. Even more worryingly, the impact of all of this builds over time, so that runaway inflation hasn’t just damaged our ability to make ends meet today, it has also affected the levels of debt we’re carrying and the resilience we’re building for the future. For some groups of people, the future is particularly concerning.
Lower earners
Those on lower incomes are hit hardest, because they spend a disproportionate amount of their income on the essentials - which have risen in price by 12.1% - more than double the inflation rate of non-essentials. Overall, just under a third (30%) of households will be hit by rising prices this year – and either have to cut back, spend savings or borrow more. Among lower earners, this rises to almost 80%.
To make matters worse, they’re far less likely to have any costs left to cut, and they were less likely to be sitting on any extra savings built up during the pandemic. When we got to the end of 2022, households with less income than average were actually in a worse savings position than before the pandemic hit. For those with no savings left, it raises the risk that this year will see more people on lower incomes taking on unaffordable levels of debt.
And while lower earners bear the brunt, another notable trend is that those on middle incomes are starting to feel the squeeze too, and almost a third have poor or very poor resilience.
The impact of property
Those who need to remortgage this year face doing so at significantly higher interest rates, which is going to wreak havoc on both savings and debt. Their savings and debt resilience scores will drop by around 3 percentage points.
Falling house prices will also take a toll, although the severity will depend on just how far and fast prices fall. The barometer forecasts a fall of 10.4% during the year, but also models for worse conditions, which could mean a 18% drop. It won’t just affect people’s confidence and immediate financial position, it will also damage their longer-term plans, and the scores for being on track for a moderate retirement will fall 1.4 points for homeowners – compared to 0.2 points for renters. The falls are particularly striking among Gen Z and Millennial homeowners, who tend to have borrowed more to buy when house prices were higher.
Single people
There are much lower resilience scores across the board for single people – both with and without children – who are having to make a single income stretch further. Only 13% of single person households without children have very good financial resilience, compared to 41% of couples with no children. Some of the detail in the barometer also shows that people who make financial decisions with their partner tend to be more resilient than those who make decisions alone, so having a sounding board seems to help people find solutions during tougher times.”
Not just another survey
This is a huge piece of analysis we do every six months in partnership with Oxford Economics, bringing together 16 separate measures from official datasets, and using statistical modelling to build an overarching picture of people’s financial resilience - from how much savings they have to whether they’re on track for a reasonable retirement income. It gives us an overall picture of whether we are getting stronger or losing resilience, and tells us where people are vulnerable, and about the gaps in their finances.
We can also use the model to see the impact of big changes in the world around us – like rises in mortgage rates and house price drops.
It is structured around the five pillars of financial behaviour that are fundamental in order to balance current and future demands, while guarding against risks. These are: controlling your debts, protecting your family, saving for a rainy day, planning for later life and investing to make more of your money.
|
