The consumer recovery will last – with modifications

Much of the global economic recovery will ride on whether pent-up demand is released into the economy through consumer spending, and what the nature of that spending will be.

Like divergent economic growth experiences across the world, different consumer segments are likely to follow distinctive growth trajectories – some of which are already proving surprising.

Economists continue to have mixed views on how vigorous the upswing in spending will be. Some say there is a wall of money waiting, others say much of the spending has already taken place in the US and the boost from fiscal incentives will be short-lived. Others highlight that it will depend on consumer behaviour compared with pre-Covid spending patterns.

So what are current statistics telling us? The US and China are undoubtedly out of the starting blocks with respect to spending, while Europe and SA are trailing behind. But SA could well pip Europe to the post because of its better Covid-19 position currently and a higher-than-expected increase in vehicle sales – considered a good indicator.

UBS CIO Paul Donovan has a colourful way of describing the differences in consumer spending. In the US, “As restrictions ease, spending on restaurants and other personal services [is] increasing. People are switching spending to having fun (fun means something that you can post about on Instagram).”

He doesn’t believe this poses much of an inflation risk because, “for the most part, there is the supply capacity to meet this increased service sector demand”.

In Europe, spending on fun is still delayed by rising Covid-19 infections, he says.

Although the vibrant picture Donovan paints of the US could ultimately prove the inflation-mongers right, former Morgan Stanley chief economist Stephen Roach doesn’t expect such a rebound in consumer spending that it revives 1970s-style inflation.

In a recent article, Roach points out that “the post-lockdown rebound of durables consumption was fully 39% greater than what was lost during the lockdown in March and April”, and the expenditure momentum could continue with the latest round of government relief cheques giving further impetus to spending on consumer durables. But Roach expects this pent-up demand to soon be exhausted.

In SA, initial signs of an economy-wide spending increase are muted, even though some statistics are moving in the right direction, with consumer confidence improving slightly in February. Spending on durables in 2020 is still 8.5% lower than the previous year. But durable expenditure in the last quarter of 2020, measured at constant prices, seasonally adjusted and annualised, was close to its quarter one 2020 level. Semi-durables expenditure hadn’t quite caught up to its first quarter 2020 level by the fourth quarter and is still 13.7% lower, compared with a 5.4% decline in total expenditure.

Domestic expenditure is not likely to experience the same savings tailwinds as in the US. SA household savings were at 2% of GDP in 2020 — up on the previous year’s 1.2% but still a fraction of the 20% of GDP savings ratio in the US in January this year.

What type of spending is likely to prevail as the world economy begins to leave the pandemic behind? Roach doesn’t believe consumers will stop buying furniture and cars in favour of entertainment “and other pre-Covid-19 activities” because of the fear the virus has evoked.

McKinsey Global Institute, in a publication on consumer demand recovery, identified six possible consumption shifts drawn from sectors covering almost 75% of consumer spending, namely:

● The acceleration in e-grocery shopping;

● A sharp decline in live entertainment;

● The emergence of home nesting;

● A decrease in leisure air travel;

● A switch to remote learning; and

● An increase in virtual healthcare visits.

McKinsey’s developed a “stickiness test” that “identifies factors that determine whether a behavior will persist”. Looking at 2020 to 2024 and the major economies, it says e-grocery shopping, virtual healthcare visits, and home nesting are likely to stick. In contrast, remote learning, declining leisure air travel, and decreasing live entertainment are “likely to revert closer to pre-pandemic patterns ... potentially with modifications from the experience of the pandemic”.

As the world sits on the cusp of what is hopefully going to be a global rebirth, it’s not surprising that opinions are so divided on how much and how consumer spending is likely to unfold during the years ahead. We remain in unexplored territory.

Fortunately, however, even in South Africa the first seeds of consumer confidence and a spending recovery are starting to sprout. DM168