Can Consumers Drive the Post-Covid Recovery?
The global economy has suffered its worst performance since the Great Depression last year. A drop in household demand was a key part of the contraction as foreclosure restrictions were implemented. However, there is growing hope that reopening economies and unleashing pent-up demand will generate a powerful consumer-led recovery.
Stable personal income and accumulation of cash
Despite the dramatic drop in production last year, personal income has remained relatively stable during the Covid-19 pandemic. Household balance sheets have been stabilized by government employment maintenance programs, the extension of unemployment benefits and stimulus checks. According to data from the rating agency Moody’s, consumers in the global economy have accumulated excess savings of nearly $ 5.4 trillion.
There are three main reasons why cash flow has grown. First, forced savings: the shutdown of non-essential retail businesses, as well as travel and leisure options, has kept consumers from spending their money even if they wanted to. Second, higher precautionary savings: nervous consumers were concerned about rising unemployment and therefore increased their financial safety net. Third, the budget transfer: the increase in household savings is the counterpart of fiscal deficits.
Consumer confidence on the rise
Improving sentiment around vaccination programs, the reopening of the service sector and the flow of fiscal stimulus have been reflected in recent data on retail sales and consumer confidence. In the United Arab Emirates, 74% of consumers are increasingly optimistic that the economy will recover in two to three months and become as strong or stronger than before the coronavirus, according to a recent survey of consumer sentiment by McKinsey & Company. However, it should be noted that their overall spending remains low.
Risks to consumer recovery
There are still reasons why households can keep their money longer. More cautious households could use the money to repay debts or increase their safety net until the pandemic ends or labor market conditions improve. If the coronavirus variants reduce vaccine efficacy rates and the recovery begins to slow, then consumer confidence could deteriorate rapidly again. Encouraging growth prospects Moody’s estimates that the global figure for additional savings since the pandemic is over 6% of gross domestic product. If consumers spent a third of that amount, it would increase global production by two percentage points this year and next. Barclays Investment Bank predicts that private consumption in the United States will grow by 8.1% this year, which will help propel the growth of the world’s largest economy to more than 7% in 2021.
We believe that global immunization programs will help stop the virus, central bankers will examine any short-term inflation spikes, and labor markets will recover (albeit at an uneven pace). Therefore, consumer confidence should continue to improve and support growth prospects.
Sectors where consumers are likely to spend
When trying to capitalize on the war chest of global consumers, investors can gravitate to the consumer discretionary sector. Globally, however, this sector has already doubled from pre-pandemic levels, raising questions about the potential opportunities. Deprived of spending opportunities, consumers are now ready to take to the streets; however, the sectors likely to prosper may not be the ones that have suffered the most.
With most households confined to their homes and therefore less likely to consume services, it is not surprising to see e-merchants, DIY stores and luxury businesses being the main contributors to this outperformance. On the other hand, many companies exposed to the travel and leisure industry, including restaurants, have fallen significantly behind. With economies reopening, the gradual recovery of international travel, and consumers starting to spend more on services, they appear to be in a good position to benefit. On the goods side, clothing is likely to experience the biggest rebound as consumers feel the urge to buy clothes again.
Focus on balance sheets, not price charts
Despite all the opportunities in the recovery, we don’t think the market has missed anything here. The fact that the shares of many travel-exposed companies remain well below their pre-pandemic level is, in part, justified as many have had to raise capital, be it equity or debt, to survive the pandemic. during the last twelve months. As a result, while the incomes and profits of companies exposed to travel may recover relatively quickly, the change in their capital structure is likely to justify lower valuations. In this context, it might be important for many investors to proceed with caution and avoid bottom fishing. Finally, if consumers decide not to spend but to invest, asset managers could benefit.
Henk Potts is EMEA Market Strategist and Julien Lafargue is Chief Market Strategist at Barclays Private Bank