Could the 'fear factor' hold back a post-Covid boom?

Families are champing at the bit to spend their lockdown savings, but a growing degree of caution could limit the rebound

It is easy to see why the economy might take off in 2021 like never before.

A year of forced suppression means families have stayed at home, slashing spending on going out, holidays and commuting.

For those working from home it has been a golden opportunity to pay down debts and build up savings.

As soon as enough people have been vaccinated, we can scrap Covid rules and go all-out on a national bender, spending like mad, catching up with old friends and travelling in style.

The economy will snap back in no time. Order will be restored, the retail and hospitality industries will be back on their feet and we can get back to living life.

Or will we?

On aggregate, certainly household finances look impressive. Families have built up well over £100bn in extra savings, and paid down around £20bn of consumer debts.

But look under the bonnet, and there are reasons for concern.

Surveys from the Bank of England indicate that those extra savings are concentrated among high-income households, while those on middling and lower incomes have typically run down their savings instead.

As a result those on lower incomes - below £35,000, in the Bank’s surveys - will have less to spend when restrictions lift than they had before the pandemic came along.

The second key factor is that there are reasons for families to be cautious even once Covid appears to have passed.

Britain is on to its third big lockdown.

Each time households hoped they could return to normal, then found restrictions enforced again. They may not want to run down their savings right away for fear of another blow to come later in the year.

Repeated opening and closing of the economy “incurs unnecessary costs, especially in the most afflicted industries - restaurants bring in stock then find a few days later that they have to close again, so it is all wasted”, says economist Brian Hilliard at Societe Generale.

“These are firms which are on the edge anyway, so this is another call on their dwindling cash reserves.” He anticipates only a “very muted recovery”.

Furlough and other support schemes are due to end in the spring. As a result unemployment is expected to rise.

The Office for Budget Responsibility expects joblessness to climb to around 7.5pc in the coming months, up from below 4pc at the end of 2019.

When people fear for their jobs, they cut back on non-essential spending.

If large numbers of people do this at once, it can become a self-fulfilling fear, as businesses find themselves short of customers and so are forced to lay off workers, generating that unemployment that was the cause of the fear in the first place.

Helen Barnard at the Joseph Rowntree Foundation notes that the hardest-hit industries, including retail and hospitality, contained a disproportionately large share of low-paid workers before the pandemic.

As a result of the virus and lockdown rules, they are more likely than most to have lost their jobs or had hours and pay cut, and the least likely to be able to work from home.

At the same time, low-income families have typically suffered more from higher costs, including home energy bills, while lockdown makes it harder to shop around for the best deals on essentials including food.

“We have seen two effects. One is people having to cut back on essentials, and the other is people getting into debt,” she said.

“You can imagine a ‘K-shaped’ economic recovery, where half the country skips out of public health restrictions joyfully going to restaurants, but half comes out on their knees with pressure piling up on them.”

So what is the net result of these countervailing forces?

Ben Broadbent at the Bank of England expects some hesitancy, but overall anticipates a prompt recovery.

“There may be some residual ‘fear factor’ in some cases,” he says, but “if the experience of last year is anything to go by, not just in this country but in just about every other advanced economy, you would expect a reasonably sharp recovery certainly initially as measures are eased.”

As those with money go out and spend it, that should help generate a recovery in those hard-pressed retail and leisure industries.

Dr Sheheryar Banuri, a behavioural economist at the University of East Anglia, expects relief at the end of the pandemic and pent-up desire to see friends, socialise and go on holiday to blow most of the other concerns out of the water.

“What we are likely to see is an explosion in activity that has been constrained for so long,” he says.

“Will all this behaviour compensate for all that behaviour which was stopped or withheld during these lockdowns? Probably not. But you would expect a distinct flurry of activity.”

Joe Staton, at GfK, which has been carrying out consumer surveys for decades, expects individual experiences to shape each person’s response, ultimately leading to a significant recovery in confidence, and so in spending and the wider economy.

“Now people can see an end to it, I am expecting confidence to rebound, and when confidence rebounds we know people will go out and spend, will invest in the future, will book holidays, will buy cars. There is a huge amount of latent demand in the system, despite all of the people who have been severely negatively affected economically by the rebound,” he says.

“The vaccine is a bit like the lottery – you don’t believe anyone wins anything until you know someone who has won. Once we know people who have been vaccinated, it will add to confidence.

“Once my mum has had the jab, I will feel a lot happier.”

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