Low- and middle-income families now less able to cope with recession than before 2008 crisis, study finds

Risk of UK downturn biggest since 2007, but households less able to cope, think tank warns

Most UK families would suffer more from a post-Brexit recession than they did during the 2008 financial crisis, a new report has found.​

Low and middle earners are more vulnerable to the next economic shock than they were in 2008, according to a study by the Resolution Foundation.

This is mostly because the impact of the last recession is still being felt by many families, meaning they would struggle to cope with another downturn.

Incomes have fallen since 2008 amid stagnant wages and increased costs, meaning families have had to cut their outgoings and are now spending a much greater share of their income on essential items such as food and energy. That leaves little scope for further savings in the event of another downturn.

A greater proportion of families than in 2008 also have no savings to draw upon in tough times. Almost 60 per cent of low- and middle-income households have no money set aside, the study found – an increase of a quarter since the last financial crisis.

Welfare cuts since 2010 also mean many households would be less able to cope with another recession.

The Resolution Foundation report, titled A Problem Shared?, was published after the think tank warned that the risk of a UK recession is now at its highest level since 2007, amid faltering economic growth and fears over the impact of a no-deal Brexit.

Last week, the Bank of England downgraded its UK growth forecast and said there was now a one in three chance of a recession in the coming months.

The Resolution Foundation said that, historically, recessions had disproportionately affected poorer households but that the impact of the 2008 crash was spread somewhat more equally.

Across the board, earnings fell by £32 a week between 2008 and 2014, it said – the equivalent of £1,664 a year.

James Smith, research director at the Resolution Foundation, said: “Britain is facing the highest risk of recession risk since 2007, and we know from previous downturns that it is lower-income households that bear the brunt of economic downturns when it comes to their living standards.

“The deep income squeeze that followed the last financial crisis may have been more equally shared than previous recessions. But its depth and length has had a disproportionate impact on the resilience of lower-income households, who now have less scope to reduce non-essential spending or draw down on savings to weather a further recession than they did after the 2008 crisis.

“The global slowdown and continued Brexit uncertainty are making recession preparedness even more urgent. In its response, the government should consider policies that limit and mitigate the effects of the recession, particularly for the most vulnerable in society.’

In 2008, the study found, the welfare system played a key role in protecting lower-income households from the worst effects of the recession.

Major cuts to benefits since then mean this support is likely to be much more restricted in the event of another crisis.

While the effects of the 2008 collapse were spread more equally than in the past, the fall in incomes has particularly affected low earners. The Resolution Foundation found that low-income households had to cut their spending by three times more than the average between 2009 and 2014.

As a result, lower-income families are spending a much bigger proportion of their incomes on daily essentials.

The think tank said the government should tailor economic policy to help those on lower incomes to cope with a possible recession.

It warned Boris Johnson against pushing ahead with plans to cut income taxes, saying this would overwhelmingly benefit higher earners.