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CONSUMER ECONOMY IN TROUBLE

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THE peddlers of crackpot COVID-19 conspiracy theories missed a trick. Forget 5G: a more believable ruse would have been that the US tech giants set off the coronavirus pandemic. Such has been the impact on the FAANG stocks that the idea, fanciful of course, might have gained some traction. Facebook, Amazon, Apple, Netflix and Google/Alphabet, and Microsoft too, have all done extremely well out of lockdown.


Not just because of the immediate rush to use their services but because of the bets placed by investors that they will go on to thrive in a post-COVID-19 world where consumer habits would have evolved, or at least changed.


These companies are providing new(ish) ways of doing and getting the things that we want, whether that’s inflatable kayaks or films. It’s largely a switch of expenditure from one type of retailer or service to another, which has been accelerated by the virus. But it’s quite possible that a medium-term legacy of lockdown could be less spending, in a structural change away from consumption towards saving.


The percentage of household income not spent - or the savings ratio - fell to somewhere near an all-time low. That’s historically very low, and the savings ratio always increases in recessions as households become fearful for the future - and now, uniquely, when whole avenues of spending are closed off. The savings rate usually goes up during recession as households move to protect their finances. Those who’ve been lucky enough to work from home throughout on full or near-full pay, and even those furloughed, have found monthly surpluses in their bank accounts as outgoings have fallen, in many cases substantially. 

According to the Institute for Fiscal Studies, a quarter of household spending goes to things like eating out, commuting and other transport, going on holiday, shopping for non-essentials – all of which have been restricted. Essentials make up only half of household spending.
Many households will have discovered or remembered the joy of having a surplus at the end of the month. Others will realise that they don’t need to buy a lot of things or spend hours driving around for ‘leisure’. 


Vulnerable


For those more vulnerable to COVID-19’s economic fallout, the full consequences are still not clear, as the furlough scheme is yet to unravel. But those who have suffered - and are yet to suffer - hardship and anxiety will, as they restart their working and social lives, seek to shore up their finances.


Almost half of household spending goes to essentials like groceries, housing costs and utilities, where it is harder to cut back - and that proportion rises considerably for poorer households. Many – for very good reasons – won’t have had a safety buffer of savings in March, and some will still not have the means to start saving. But the shock will scare significant numbers into pulling out all the stops, at least to pay down debt. COVID-19 has, for the moment anyway, kyboshed the growing expenditure on leisure and ‘experiences’.


A lot depends on the emergence or otherwise of a vaccine: if one arrives soon (within say six to eight months) and works, changes to spending will be limited. But any longer and habits start to become entrenched – and the sufferings of the ‘experiential’ sector will deepen, with more firms going out of business and reduced choice. There’s push and pull effects going on. On the one hand, many households will realise they were spending unnecessary amounts in bars and restaurants and spas and nail bars and on holidays, and decide to reset their priorities.


On the other hand, those things will all be, for the next year at least, noticeably different to and less enjoyable than they were pre-COVID-19. Many people faced with the option of going to a half-empty restaurant to be served by someone wearing a mask will decide that is not what going to a restaurant is all about, and just stop going. 


It will be a very long time before gyms, spas, cinemas, theme and leisure parks get ‘back to normal’. In the meantime, habits change, the money goes to other things – nice meals at home perhaps, which are a lot cheaper than the restaurant.
The longer ‘going out’ experiences, as well as the shopping environment both on the high street and at retail centres, remain altered for the worse, the longer we’ll get used to being without them.


This is the big difference with previous downturns, as far as the consumer economy is concerned. The paradox of thrift says that while it makes sense for households to spend less during a recession, that, unfortunately, makes the economy worse. The monetary and fiscal stimulus washing around will for the moment offset that and stave off real economic disaster. But a spike in post-furlough unemployment - which I fear will be worse than expected - will only widen the hole in the consumer economy. People will be battening down the hatches for a while yet.

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