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Consumer Reaction to the Credit Crunch - UK - January 2009

For the last half decade, consumers have been making the most of cheap and readily-available credit, underpinned by the confidence that soaring house prices bring to homeowners. And for the last half decade, if not longer, pundits have been pointing out that this situation simply wasn’t sustainable.

These pundits have been proved spectacularly right. The sub-prime crisis in the US turned into a worldwide credit crunch. In turn, the credit crunch is set to turn into a severe and prolonged downturn. In the final quarter of 2008, amid rising unemployment, repossessions and insolvencies, the UK officially entered recession, defined as two consecutive quarters of negative GDP growth.

As far as consumers are concerned, though, it is early days. Unemployment may be rising, but it is well below the levels reached during the last recession. Inflation has started to fall, and base rates have been slashed – meaning that many mortgage holders will actually be better off. Just how hard is the slowdown hitting the average UK consumer? Which market segments are struggling to make ends meet, and which segments are – so far – entirely untroubled by the slowdown?

This report draws on exclusively commissioned consumer research, including a series of online focus groups, to answer these questions. It examines just how consumer behaviour is changing: where they are cutting back on spending; whether the banking collapses have prompted them to switch accounts; the impact on their mortgage payments; and whether insecurity is prompting them to start paying down debts and build up ‘rainy day’ funds.

The consumer research is backed up by an in-depth examination of the macro-economic factors affecting the economy. The report also identifies where businesses can learn from the last recession, drawing on Mintel’s 1993 Out of Recession report and past economic trends.

Key issues covered in the report:

  • Background to the credit crunch, and the impact on the wider economy.

  • Consumers’ general financial well-being and economic confidence.

  • Changing financial priorities, and the return (or not) of fiscal prudence.

  • The impact of the crisis on bank confidence – whether or not people have switched accounts in favour of safer providers.

  • Trimming expenses – are people cutting back on the likes of medical or life insurance in order to make ends meet?

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Table of contents

  1. Issues in the Market

      • Key issues covered in the report
        • Abbreviations
        • Future Opportunities

          • A window of opportunity to attract switching business?
            • Security and certainty – the new watchwords
              • Simple products for complicated times
                • Life after debt
                • Market in Brief

                  • The phoney war is over – we are officially in recession
                    • Consumers are starting to feel the pinch…
                      • …but it’s not as bad as some are making out
                        • Figure 1: Impact of the downturn, December 2008
                      • Comfortable – or hard-hit?
                        • Bank failures not an issue for most people…
                          • …but negative equity is starting to take hold
                            • What happened last time round?
                              • Figure 2: Worst-hit market segments in the 1990 recession
                            • Offering security in an uncertain world
                              • Who will benefit when confidence returns?
                                • Figure 3: Top spending priorities once consumers are financially secure, August/September 1992
                            • Background to the Credit Crisis

                              • Key points
                                • The basics – what is a credit crunch?
                                  • Timeline – how the crisis unfolded
                                    • Figure 4: Major financial and economic developments, 2006-08
                                  • From sub-prime to credit crunch
                                    • Shifting the risk
                                      • Contagion spreads…
                                        • …and household names go to the wall
                                        • Broader Economic Climate

                                          • Key points
                                            • Current Mintel projections
                                              • Slight revival to be seen at the end of 2009?
                                                • Beyond 2010
                                                  • Key macroeconomic indicators
                                                    • Base rates plunge…
                                                      • Figure 5: BoE base rate and RPI, 2003-08
                                                    • …but what effect will this have on spending?
                                                      • Saving the windfall
                                                        • Consumers and policymakers at odds?
                                                          • Unemployment ticks upwards
                                                            • Figure 6: Unemployment levels, seasonally adjusted, 2003-08
                                                          • The housing market
                                                            • House prices falls further undermine confidence
                                                              • Figure 7: Annual house price changes, Nationwide and Halifax indices, 2007-08
                                                            • Mortgage lending and property transactions tumble
                                                              • Figure 8: Mortgage approvals and property transactions, 2002-08
                                                            • How will a housing slowdown affect the wider economy?
                                                              • Consumer credit
                                                                • Further signs of a new prudence?
                                                                  • Figure 9: Gross new consumer credit, 2003-08
                                                                • An end to consumer denial
                                                                  • Figure 10: Gross new credit card lending and amount outstanding, 2003-08
                                                                • Insolvencies jump in the second half of 2008
                                                                  • Figure 11: Individual insolvencies in England and Wales (seasonally adjusted), Q1 2002-Q3 2008
                                                                • The impact on retail spending
                                                                  • The retail recession to start in 2009?
                                                                    • Figure 12: Retail sales trends, Nov 2007-Nov 2008
                                                                  • Christmas – mixed fortunes
                                                                    • Leisure – little luxuries, or unnecessary spend?
                                                                      • Travel – the new essential…
                                                                        • Figure 13: Number of domestic and overseas holidays, 2003-08
                                                                      • …but could people cut back on short breaks?
                                                                        • Small sacrifices to maintain lifestyles
                                                                        • Then and Now – Parallels with 1991-95

                                                                          • Key points
                                                                            • A debt-driven recession
                                                                              • Finding comparables
                                                                                • Last time around – five quarters in recession…
                                                                                  • Figure 14: Quarterly GDP change, 1986-95 & 2004-08
                                                                                • …and a half decade of stagnating property prices
                                                                                  • Figure 15: House price changes, 1986-95 & 2004-08
                                                                                • Freedom of information
                                                                                  • Short sharp shock – or a sign of worse to come?
                                                                                    • Figure 16: UK unemployment, 1988-95 & 2004-08
                                                                                  • Learnings from the Out of Recession – 1993 report
                                                                                    • Maintaining leisure spend – at the expense of durables
                                                                                      • Figure 17: Worst-hit market segments in the 1990 recession
                                                                                    • Staying in is the new going out (again…)
                                                                                      • New cars and furniture dropped to the bottom of the list of priorities
                                                                                        • Figure 18: Items consumers had postponed buying in the previous 12 months, September 1992
                                                                                      • Maintaining lifestyle – as important in 1992 as it is in 2009
                                                                                        • The least affluent were worst-hit…
                                                                                          • Figure 19: Consumers who had category switched in the previous 12 months, by demographic group, September 1992
                                                                                        • …but could mortgage holders escape in 2009?
                                                                                          • The young and mortgage holders cut back hardest
                                                                                            • Figure 20: Summary of the main consumer groups category switching, by main product markets, September 1992
                                                                                        • Industry Insight

                                                                                          • The common thread
                                                                                            • Less room for investment…
                                                                                              • …but more for protection?
                                                                                                • Insurance – shopping around, not cancelling…
                                                                                                  • …although ‘luxury’ lines could be hit
                                                                                                    • A boost for the aggregators?
                                                                                                      • Banking – security to the fore
                                                                                                        • Concerns over loan books
                                                                                                          • Impact on consumer credit markets
                                                                                                          • Consumer Sentiment

                                                                                                            • Key points
                                                                                                              • It’s the economy, stupid
                                                                                                                  • Figure 21: Change in the leading concerns among UK adults, February 2008-January 2009
                                                                                                                • Consumer confidence – which events are shaping confidence?
                                                                                                                  • Figure 22: UK consumer confidence index, 2002-08
                                                                                                                • Making ends meet, not making big purchases
                                                                                                                  • Figure 23: Spending and saving confidence, March 2001-September 2008
                                                                                                                • A break between spending and saving
                                                                                                                  • Financial activity – which sectors will win out?
                                                                                                                    • Figure 24: Savings, investment, borrowing and debt repayment – consumers’ expected activity, 2002-08; Quarterly indices
                                                                                                                  • Consumer credit – the last throw of the dice?
                                                                                                                    • Figure 25: Intended consumer credit activities, Q3/Q4 2002-Q3/Q4 2008
                                                                                                                    • Figure 26: Expected mortgage and property purchase activity, Q3/Q4 2002-Q3/Q4 2008
                                                                                                                  • Savings – will good intentions translate into activity?
                                                                                                                    • Figure 27: Intended saving activities, Q3/Q4 2002-Q3/Q4 2008
                                                                                                                • The Consumer – Financial Confidence and Future Prospects

                                                                                                                  • Key point
                                                                                                                    • Two thirds keep their finances on an even keel…
                                                                                                                        • Figure 28: Personal financial situation, December 2008
                                                                                                                      • …but many are finely poised
                                                                                                                        • How does reality match up to press coverage?
                                                                                                                          • Lower earners and the self-employed the first to feel the strain?
                                                                                                                            • Squeezing family incomes
                                                                                                                              • No need to panic – but people can’t help but worry
                                                                                                                                  • Figure 29: Financial prospects, December 2008
                                                                                                                                • Confidence among the better-off
                                                                                                                                  • Figure 30: Financial prospects, by socio-economic group, December 2008
                                                                                                                                • One eye on retirement
                                                                                                                                    • Figure 31: Financial prospects, by socio-economic group, December 2008
                                                                                                                                • The Consumer – Impact of the Credit Crunch

                                                                                                                                  • Key points
                                                                                                                                    • Have people even noticed the crunch?
                                                                                                                                        • Figure 32: Impact of the downturn, December 2008
                                                                                                                                      • Wide-reaching effects
                                                                                                                                        • Key financial groups
                                                                                                                                          • From hard hit to comfortable and confident
                                                                                                                                              • Figure 33: Key financial groups, December 2008
                                                                                                                                            • Group 1: Comfortable and confident (21% of the sample)
                                                                                                                                              • Group 2: Feeling the pinch (52% of the sample)
                                                                                                                                                • Group 3: Fearing for the future (16% of the sample)
                                                                                                                                                  • Group 4: Hard hit (11% of the sample)
                                                                                                                                                    • Young and old the last to feel the strain
                                                                                                                                                      • Figure 34: Key financial groups, by age, December 2008
                                                                                                                                                    • Children a major factor
                                                                                                                                                      • Figure 35: Key financial groups, by age, December 2008
                                                                                                                                                    • The middle classes more likely to be comfortable…
                                                                                                                                                      • Figure 36: Key financial groups, by socio-economic status, December 2008
                                                                                                                                                    • …but they don’t totally escape the downturn
                                                                                                                                                      • The South is hit – but it’s not a London-based recession
                                                                                                                                                        • Personal loans – an already troubled sector could get worse
                                                                                                                                                          • Buying security
                                                                                                                                                              • Figure 37: Product ownership, by key financial groups, December 2008
                                                                                                                                                            • When will it end?
                                                                                                                                                            • The Consumer – Spending and Saving

                                                                                                                                                              • Key points
                                                                                                                                                                • Cutting down on the little luxuries…
                                                                                                                                                                    • Figure 38: Spending cutbacks over the past six months, December 2008
                                                                                                                                                                  • Travel could suffer…
                                                                                                                                                                    • …but finance stays strong – on the whole
                                                                                                                                                                      • Can parents trim spending?
                                                                                                                                                                        • The strugglers are making the most cutbacks…
                                                                                                                                                                          • Figure 39: Spending cutbacks over the past six months, by key financial groups, December 2008
                                                                                                                                                                        • …and are cutting back on core spending
                                                                                                                                                                          • Holidays and saving plans deferred
                                                                                                                                                                              • Figure 40: Spending cutbacks over the next six months, December 2008
                                                                                                                                                                            • Leisure or luxuries – which industries stand to lose out?
                                                                                                                                                                              • Figure 41: Spending cutbacks over the next six months, by key financial groups, December 2008
                                                                                                                                                                            • Even the mainstream are cutting back
                                                                                                                                                                            • The Consumer – Savings and Investments

                                                                                                                                                                              • Key points
                                                                                                                                                                                • How many people were caught up in the bank failures?
                                                                                                                                                                                    • Figure 42: Impact of bank failures and bailouts, December 2008
                                                                                                                                                                                  • Flight to safety among older consumers
                                                                                                                                                                                    • Has Government action maintained confidence?
                                                                                                                                                                                      • Figure 43: Impact of bank failures and bailouts, December 2008
                                                                                                                                                                                    • Moving up the investment ladder
                                                                                                                                                                                      • Figure 44: Impact of bank failures and bailouts, by savings ownership, December 2008
                                                                                                                                                                                    • Opportunities are still out there
                                                                                                                                                                                      • Long-term investments – time for a bargain?
                                                                                                                                                                                          • Figure 45: Stock markets and the credit crunch, December 2008
                                                                                                                                                                                        • A comfortable retirement?
                                                                                                                                                                                          • Those in the market are nursing losses – but considering new purchases
                                                                                                                                                                                              • Figure 46: Stock markets and the credit crunch, by savings ownership, December 2008
                                                                                                                                                                                            • Not only confident about their own financial situation
                                                                                                                                                                                                • Figure 47: Stock markets and the credit crunch, by key financial groups, December 2008
                                                                                                                                                                                            • The Consumer – Mortgages and Housing

                                                                                                                                                                                              • Key points
                                                                                                                                                                                                • The credit crisis – putting home moves on hold…
                                                                                                                                                                                                    • Figure 48: Impact on the housing market and moving plans, December 2008
                                                                                                                                                                                                  • …but still only a minority concern
                                                                                                                                                                                                    • A chance to get on the ladder?
                                                                                                                                                                                                      • But also the danger of negative equity
                                                                                                                                                                                                        • Arrears up among the less affluent
                                                                                                                                                                                                          • Remortgaging – alright for some, a problem for others
                                                                                                                                                                                                            • A wave of negative equity among the Hard Hit
                                                                                                                                                                                                                • Figure 49: Impact on the housing market and moving plans, by key financial groups, December 2008
                                                                                                                                                                                                            • The Consumer – Insurance and Protection

                                                                                                                                                                                                              • Key points
                                                                                                                                                                                                                • Insurance – an easy target for cost-cutting?
                                                                                                                                                                                                                    • Figure 50: Impact on insurance and protection products, December 2008
                                                                                                                                                                                                                  • Looking for a bit of reassurance as the years go by?
                                                                                                                                                                                                                    • Figure 51: Impact on insurance and protection products, December 2008
                                                                                                                                                                                                                  • Easy to value insurance when you’re comfortable and confident
                                                                                                                                                                                                                      • Figure 52: Impact on insurance and protection markets, by key financial groups, December 2008
                                                                                                                                                                                                                  • Who Can Win in a Slowdown?

                                                                                                                                                                                                                    • Key points
                                                                                                                                                                                                                      • What were the priorities last time round?
                                                                                                                                                                                                                        • Figure 53: Top spending priorities once consumers are financially secure, August/September 1992
                                                                                                                                                                                                                      • Zopa – cutting out the banks and beating the base rate
                                                                                                                                                                                                                        • Innovation – Apple are giving people a reason to upgrade…
                                                                                                                                                                                                                          • …not just to replace
                                                                                                                                                                                                                            • The new austerity in the food and drink sector
                                                                                                                                                                                                                              • Drinking your troubles away
                                                                                                                                                                                                                                • Emerging from the recession – the strong will prosper
                                                                                                                                                                                                                                  • Car manufacturers need to concentrate their efforts
                                                                                                                                                                                                                                    • Blockbusters and bookmakers – the way forward for leisure
                                                                                                                                                                                                                                      • Re-packaging the packaged holiday
                                                                                                                                                                                                                                      • Appendix: Consumer Sentiment

                                                                                                                                                                                                                                          • Figure 54: How concerns of the British population have shifted over the past year/two months
                                                                                                                                                                                                                                      • Appendix: The Consumer – Financial Confidence and Future Prospects

                                                                                                                                                                                                                                        • Current financial situation
                                                                                                                                                                                                                                          • Figure 55: Personal financial situation, by demographic group, December 2008
                                                                                                                                                                                                                                        • Financial prospects
                                                                                                                                                                                                                                          • Figure 56: Financial prospects, by demographic group, December 2008
                                                                                                                                                                                                                                      • Appendix: The Consumer – Impact of the Credit Crunch

                                                                                                                                                                                                                                        • Impact of the downturn
                                                                                                                                                                                                                                          • Figure 57: Impact of the downturn, by demographic group, December 2008
                                                                                                                                                                                                                                        • Key financial groups
                                                                                                                                                                                                                                          • Figure 58: Present and future economic confidence and impact of the credit crunch, by key financial groups, December 2008
                                                                                                                                                                                                                                          • Figure 59: Key financial groups, by demographic group, December 2008
                                                                                                                                                                                                                                      • Appendix: The Consumer – Spending and Saving

                                                                                                                                                                                                                                          • Figure 60: Most likely cutbacks in last six months, by demographic group, December 2008
                                                                                                                                                                                                                                          • Figure 61: Least likely cutbacks in last six months, by demographic group, December 2008
                                                                                                                                                                                                                                      • Appendix: The Consumer – Saving and Investing

                                                                                                                                                                                                                                          • Figure 62: Impact of bank failures and bailouts, by demographic group, December 2008
                                                                                                                                                                                                                                          • Figure 63: Stock markets and the credit crunch, by demographic group, December 2008
                                                                                                                                                                                                                                      • Appendix: The Consumer – Mortgages and Housing

                                                                                                                                                                                                                                          • Figure 64: Impact on the housing market and moving plans, by demographic group – total population, December 2008
                                                                                                                                                                                                                                          • Figure 65: Impact on the housing market and moving plans, by demographic group – mortgage holders only, December 2008
                                                                                                                                                                                                                                      • Appendix: The Consumer – Insurance and Protection

                                                                                                                                                                                                                                          • Figure 66: Impact of downturn on insurance and protection products, December 2008

                                                                                                                                                                                                                                      Companies Covered

                                                                                                                                                                                                                                      • Bank of America Corporation
                                                                                                                                                                                                                                      • Bank of England
                                                                                                                                                                                                                                      • Barclays Bank plc
                                                                                                                                                                                                                                      • Bear Stearns
                                                                                                                                                                                                                                      • Bradford & Bingley plc
                                                                                                                                                                                                                                      • British Retail Consortium
                                                                                                                                                                                                                                      • Co-operative Group
                                                                                                                                                                                                                                      • Confederation of British Industry
                                                                                                                                                                                                                                      • Debenhams Total (GTV)
                                                                                                                                                                                                                                      • Fannie Mae
                                                                                                                                                                                                                                      • Gfk NOP
                                                                                                                                                                                                                                      • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                                                                                                      • J. Sainsbury
                                                                                                                                                                                                                                      • JD Wetherspoon
                                                                                                                                                                                                                                      • John Gilbert Financial Research
                                                                                                                                                                                                                                      • John Lewis Plc (department store)
                                                                                                                                                                                                                                      • JPMorgan Chase & Co
                                                                                                                                                                                                                                      • Land of Leather Ltd
                                                                                                                                                                                                                                      • Lehman Brothers [UK]
                                                                                                                                                                                                                                      • Lloyds Banking Group
                                                                                                                                                                                                                                      • Marks & Spencer
                                                                                                                                                                                                                                      • Merrill Lynch (UK)
                                                                                                                                                                                                                                      • NatWest
                                                                                                                                                                                                                                      • Northern Rock plc
                                                                                                                                                                                                                                      • Rightmove Plc
                                                                                                                                                                                                                                      • Royal Bank of Scotland Group plc
                                                                                                                                                                                                                                      • Tesco Plc
                                                                                                                                                                                                                                      • Washington Mutual Inc
                                                                                                                                                                                                                                      • Woolworths Group plc
                                                                                                                                                                                                                                      • Zavvi

                                                                                                                                                                                                                                      Consumer Reaction to the Credit Crunch - UK - January 2009

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