17 March 2021

Don’t bet on consumer spending for the Covid recovery

By Jack Barnett

The economy has been in an induced coma, and many are pinning their hopes on a burst of consumer spending to jolt it back to life. But months of inactivity may be masking changes to habits and perceptions that could lead to a greater propensity to save. This means recovery may not be as simple as just unleashing pent-up demand.

We shouldn’t underestimate the psychological effect of the pandemic, which has intensified our alertness to unforeseen global events and illuminated the speed at which livelihoods can suddenly be upended. Greater awareness of that uncertainty may cause people to be more more inclined to save in case of future economic turmoil.

Of course, people’s approach to saving will differ widely compared to income levels and job security, just as our experiences of the pandemic have. Those who have been made redundant and entered the pandemic with low cash savings have experienced acute hardship and a sharp fall in living standards, while many of those who have continued to work – albeit remotely – have been able to build a nest egg thanks to reduced outgoings.

A large proportion of the former group consists of young people working in sectors hardest hit by the pandemic. They should not be called upon to lead the consumer recovery as they currently lack the resources to revert to pre-pandemic spending patterns.

This group’s behaviour may have been fundamentally altered by their experience of the pandemic. When they do get a new job they may divert a larger proportion of their income to saving to make sure they are better prepared for any future economic shocks.

The financial beneficiaries of the Covid era tend to be older, white collar workers. It’s this cohort that many are predicting will lead the post-Covid consumption boom. This may be justified given the large volume of savings they have accumulated, meaning they will not have to reduce spending to create cash buffers.

However, this group also tends to have higher levels of debt, meaning they could continue the trend toward repaying credit card debt or mortgages, even after the worst Covid effects have begun to dissipate.

Others have suggested young people who have remained in full-time employment throughout the pandemic could drive the recovery. Again, this could be ill-judged. This group – particularly those living and working in London – have historically had relatively modest financial resources. This is the first time many of them have built up enough capital to pursue financial goals, such as getting on the property ladder, meaning they may be reluctant to revert pre-pandemic spending habits.

Inflation may hit short-term spending

Then again, inflationary pressures triggered by the resumption of normal economic activity could offset a greater tendency to save. Consumers could rush to purchase goods and services to avoid price rises in the future, while the erosion of savings sitting in accounts with low interest rates could prompt individuals to use these resources to make big ticket asset purchases.

However, nuanced experiences of inflation can deter people from bringing purchases forward. This is partly due to consumers typically noticing price rises in their individual basket of goods more deeply than economy-wide inflation, which often causes them to immediately reduce expenditure on certain products, which means lower overall demand in the economy.

Indirectly stimulating consumption is crucial

If savings rates do remain elevate, that will feed through to persistently higher unemployment. Businesses will be more prone to align production with lower household consumption. Reluctance to invest would intensify due to expectations that insufficient demand would lead to losses and possible insolvency. Fewer people in work has obvious implications for spending.

Policy should be geared toward unlocking reserves built up during the pandemic in an effort to indirectly influence consumption.

Increasing the volume of green investment opportunities would encourage households to allocate their newfound savings to more productive uses rather than keeping them in savings accounts. This would stimulate job creation and create incomes for people to spend.

Persuading the population to part with their newfound saving habits will be challenging. That means betting on bullish consumers to lead us out of the Covid-induced slump may be misguided.

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Jack Barnett is a Senior Account Executive at Instinctif Partners.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.