A recent analysis from the Organization for Economic Cooperation and Development (OECD) revealed that the annual growth in the price of goods and services across the group of 37 advanced countries slowed significantly in March due to the coronavirus pandemic. Inflation among these countries decreased to 1.7% from 2.3% in February, which is considered the largest deceleration since the 2008 financial crisis.
According to The Guardian, a British daily newspaper, inflation has collapsed due to the evaporating demand from consumers and businesses as governments impose tough lockdown measures to limit the spread of the virus. Janet Henry, the global chief economist at HSBC, warned that it could soar if governments and central banks overestimate the damage to global supply chains caused by the pandemic. “Inflation is heading even lower, dragged down by the latest oil price collapse,” Henry added.
This new analysis shows that COVID-19 not only cripples the economy but generally changes people’s behavior, particularly their spending habits. Recent reports show that spending has decreased across all industries as lockdown measures have restricted what we can spend money on. The pandemic has drastically altered how and where consumers choose to spend their hard-earned cash.
Changes in Consumer Spending
Changes in consumer spending are not the same in many countries but all reports from this topic have a common denominator: a drop in spending since the pandemic started. The Personal Consumption Expenditures report issued by the Bureau of Economic Analysis revealed that real personal consumption expenditures decreased by 7.3% from February to March, the single greatest decline since the figures began being recorded in 1959.
John Anderson, head of the agricultural economics and agribusiness department of the University of Arkansas System Division of Agriculture, said that the finding is a shocking month-to-month decline in PCE. “As a point of reference, in the 2008-2009 financial crisis, the largest monthly drop in PCE was just under 1% in September 2009. In fact, the 7.3% decline in PCE is the largest monthly decline since the beginning of this data series in 1959,” Anderson said.
The recent global survey by McKinsey & Company presented data explaining how the economic consequences of the coronavirus pandemic have meant consumers are less inclined to spend more. According to the World Economic Forum, an independent international organization committed to improving the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas, the researchers analyzed how consumers are changing in their spending, causing upheaval across every industry imaginable.
One of the findings showed that while consumers are still spending on basic necessities such as food, household supplies, and personal care items, there has been a decline in spending in many areas. This includes restaurants, apparel, footwear, jewelry, accessories, travel, and entertainment out of the home. However, consumers are expected to spend more on basics such as groceries, household supplies, and others. In terms of consumer optimism, the report revealed that it has dropped across the Americas and Europe since mid-March, while most Asian countries have maintained or increased their level of optimism.
Since mid-March, the researchers found that levels of optimism have dropped by 25% to 40% in the UK, France, Spain, and Italy. Germany’s optimism, on the other hand, has remained steady during the same month at a higher level than that of its European neighbors. Other countries such as China and India, which had high levels of optimism even before the COVID-19 crisis, have seen optimism increase since mid-March by around 10% each.
The decrease in spending is also driven by consumers’ expecting an income decrease in the next two weeks. According to the survey, between 25% and 63% of consumers globally expect their household income to continue to fall. Again, China and India are exceptions. Chinese and Indian consumers are the most optimistic, with 25% and 18% expecting salaries to increase, respectively. The next tier of countries includes the US, the European countries, Japan, and Korea, where 30% to 51% expect a decrease.
Anderson, however, reported that while overall consumer spending decreased, spending on food was sharply higher in March – up by over 19% compared to the prior month. This spending includes food bought for home consumption such as grocery and convenience store purchases of food. “The only surge in PCE on food even remotely comparable to the most recent month was in December 1999, which – as readers of a certain age will recall – coincided with a wave of food stockpiling associated with the Y2K scare,” Anderson said.
Reviving Consumer Spending
Recent surveys indicate that workers and businesses are now running out of time. More businesses would close, which mean more unemployment and a further drag on spending that would jeopardize the economy. “In two weeks’ time — the period of a typical paycheck — many workers will struggle to make ends meet. After a month, more than half of them could be in trouble. At that point, a fifth of small businesses with lost sales could be on the brink,” one report said.
To bring back consumer spending and optimism, experts said that consumers’ renewed confidence in the economy and their own economic well-being is important. According to Forbes, a global media company, focusing on business, investing, technology, entrepreneurship, leadership, and lifestyle, this means workers across multiple industries, including airlines, hotels, restaurants, retail, and automotive need to be rehired in sufficient numbers to truly impact consumer spending.
This will not only restore incomes for employees laid off or furloughed because of COVID-19 shutdowns but also help increase consumer confidence and spark additional spending. With these impacts, consumers across the globe expect long-lasting effects of COVID-19 on their personal routines and finances. More than 75% of consumers expect the impact of the pandemic on their routines and finances to be felt for more than two months.
Even in countries like China and India, where more than 50% of consumers are optimistic about the overall strength of their economies to rebound, they are expecting it will be more than two months before routines go back to normal.