Consumer spending poised for a strong bounce back
It seems as though even the toughest lockdown measures can’t hamper consumers’ appetite for spending. Those outside Auckland are already splashing out on takeaways. Recovery will be aided by support from the government and renewed confidence in the tough health measures. But, rapidly increasing prices could be a barrier.
Consumer spending plummets in national lockdown v2.0.
Robust consumer spending keeps the wheels of the economy turning. The consumption of goods and services by households accounts for roughly 60 percent of our expenditure GDP. When retail card spending (a proxy measure for consumer spending) tumbled by 47.2 percent between April and May 2020, it was no surprise that GDP in the June 2020 quarter contracted by 10.8 percent. As restrictions eased, both consumer spending and GDP sprung back just as fast.
As we all know, the Delta variant of COVID-19 sneaked into the country in mid-August this year, and we once again found ourselves confined to our homes. Large parts of the economy came to a near standstill as travel plans were cancelled, takeaways were no longer an option, and major purchases were put on hold. Consequently, consumer spending plummeted to levels last seen in April 2020. Spending on hospitality, services, durables, and apparel nosedived. Unsurprisingly, some of the biggest winners were supermarkets and digital entertainment.
Early signs point to a quick bounce back in consumer spending.
Since the rest of the country (except Auckland) entered alert level three and then, level two, consumers flocked to enjoy one of the simple pleasures of life denied to them for two weeks – takeaway food and beverages. Spending on food and beverage services (restaurants, cafes and bars) has skyrocketed, and in the week ending 6 September, consumers spent over 4000 percent more on these services compared to the week before. This was a result of the pent-up demand from the previous two weeks being released.
The nature of the COVID-19 recession is different to other economic downturns in modern history. There was a sudden and large shock to consumption; retail spending experienced the largest drop on record during the first lockdown. However, this shock was largely a result of mobility restrictions. Household savings rose to an unusually high 14.7 percent in the June 2020 quarter – a sign that demand was just deferred and not permanently depressed. The same is also true for this lockdown. The diverging pattern of consumer spending in Auckland compared to other regions since the easing of level four restrictions outside our largest city is a reassuring sign.
The decision by RNBZ to keep the OCR unchanged will help to sustain spending. Government support in the form of wage subsidies will limit scarring from the lockdown measures and ensure employment and household incomes remain afloat. Moreover, we went into the lockdown in an extremely strong position. The low unemployment rate, a sign of the tight labour market, provides a sense of job security to workers. Finally, the success of the tough public health measures coupled with the ramped-up vaccination campaign will further boost consumer confidence.
The recovery period threatens to leave some behind.
However, the recovery will not be even. Industries such as transport and tourism, accommodation, and arts and recreation services have been slow to recover. Consumer spending in these areas may not reach pre-pandemic levels for a while. A shift in consumer tastes will also alter the shape of industries such as digital entertainment. Moreover, inflationary pressures are only increasing as global shipping costs continue to bite, which could dampen consumer spirits. This is particularly true for those on fixed or low incomes, who typically bear the brunt of large price increases.