GDP growth or contraction is determined by volumes of personal consumption, business investment, government spending and net exports. Thus for economies such as the US, where private consumption generates almost 70% of its GDP,8 external shocks that inhibit consumer expenditure such as this current pandemic have a far-reaching effect. All eyes are on what a revival of demand might look like and which sectors will recover first.
“European countries are the least optimistic, while China’s optimism is higher, and Chinese consumers’ intent to spend across select categories is starting to recover,” notes McKinsey in its survey of consumer spending across 40 countries.9
Countries that have had more success with early containment of the Covid-19 outbreak are further ahead with displaying their likely post-pandemic consumer behaviour, which provides some clues as to how other economies are likely to see patterns of spending.
In short, behavioural changes are slowing growth in the forthcoming quarters, notes Torsten Sløk, Deutsche Bank’s Chief Economist, Deutsche Bank Securities. He summarises the household changes as follows:10
- Increase in precautionary savings for households, similar to what occurred after the Great Depression in the 1930s.
- More space between seats at restaurants, cinemas, sport events, concerts, conferences, trains, buses, and aeroplanes
- Fewer people traveling on holiday and going out socially until there is a vaccine, all contributing to lower consumer spending.
- Older generations staying at home until a vaccine is released, along with less willingness by their children to put parents in retirement homes
- Limits on the number of people in supermarkets at the same time, more online shopping, and more online doctor visits.
- Fewer people going to health and fitness clubs and joining group sports
- First-time car purchases, with more people driving their own vehicle to avoid crowded public transport
- Health insurance premiums going up (in countries where there are low levels of state provision)
“Once stores open," says Sløk, “those entities that get dollars coming in the door first will see the biggest impact on upside in terms of balance sheet and cashflow”. He adds that “secondary and tertiary services are more at risk of being more vulnerable”. Sløk explains that it makes a difference which parts of the population will be “allowed out first”. “What does it mean for the older spend on travel and culture if over-75s hear that they will not be allowed out for the rest of the year until there is a vaccine?” he asks.