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Pandemic savings to boost Black Friday, but what then?

Consumers in the US will spend Black Friday going to shopping malls or sitting in front of their keyboards to make their sales online. We should expect big sales numbers.

| 5 min read

After what is likely to be a successful Black Friday, the issue is will consumer confidence surge further? When will savers who did well financially out of the pandemic lockdowns decide to spend more of their accumulated bank deposits?

In the advanced world there was a common pattern. The lower-income groups were squeezed by pandemic policies. They lost overtime or their jobs. They needed the government’s special payments to get by, as they struggled with rent and food bills. The higher-income groups mainly kept their jobs and salary but were unable (or unwilling) to spend their pandemic savings on entertainments, holidays, travel and discretionary shopping.

Lockdown produced an army of savers

Overall, savings of people in the main countries soared during Covid-19 lockdowns. The US savings rate, usually around 7.5%, peaked at 33.8% in April 2020. The Eurozone rate reached about 25% and the Japanese rate was also been elevated. The richest groups got a further boost from holding equities and bonds, which pushed higher after the initial sell off in March 2020. Most individuals in the above-average-income groups also got a boost from the wealth effect, as their homes became more valuable.

  • 33.8% The peak US savings rate during the pandemic
  • 25% Savings rate achieved during lockdown in Eurozone

The issue now is what happens as businesses that were harmed by social-contact restrictions are eased and more normal conditions emerge?

Some of the money in the bank would have usually been spent on haircuts, meals or holidays. This economic benefit has clearly been lost. You do not go out and buy two haircuts when hairdressers reopen to make up for the cancellations. It is possible some people will wish to go out socialising more often to restaurants or entertainments post pandemic than they did previously but, more likely, most will simply seek to reinstitute their former level of such activities. It is possible people will trade up as they have more money for any given meal or theatre trip. It is possible they will want more exotic holidays. Some may even try to fit in an additional holiday away from home.

So far, savings rates have been coming down to the levels seen before the closures. The current US rate is back to 7.5%. If some of the backlog of savings is to be spent, these rates will fall further. There are estimates that an extra $3 trillion of money has been banked as a result of high savings over the last two years. That would take a lot of trading up in meals and holidays to draw it all down.

Time to splash out?

It clearly means individuals have scope to treat themselves to new cars, substantial home improvements, new technology or anything else that takes their fancy when they are available. Their confidence to do so would be knocked if they felt macro policy was shifting to slowdown, higher taxes and higher interest rates – as that would hit the value of their homes and financial investments and might start to undermine their job outlook.

There are supply constraints on satisfying consumer demand.

What’s more likely is there will be sufficient confidence to allow surges of spending to occur as attractive services and products become more widely offered. This provides some support for demand – and implies some continuation of inflationary pressures. The fact that the higher income groups want more meals out and better holidays gives the companies supplying them considerable pricing power. The manpower-intensive nature of many of the services people want implies upward movements in wages for all those in hospitality, catering, entertainment and travel as those businesses scramble to put in more capacity. There are still cases of frustrated consumers, unable to buy the new car of their choice or get a fitter to put in the new kitchen. There are supply constraints on satisfying consumer demand.

Governments will want some back

The last two years have seen an unprecedented improvement in the overall financial position of individuals and families, heavily skewed to the better off, and a very large deterioration in the financial position of governments.

Governments and central banks borrowed on a huge scale and created massive amounts of money to transfer funds to the private sector, particularly to the lower paid who were badly hit by events, and to companies that were badly impeded in their trading. Some think the governments should now tax some of that money back from the private sector to end the deficits or repay some debt.

The US is planning some substantial tax hikes and the EU is looking at special carbon taxes to swell its revenues. The most likely outcome is some inflationary pressure from consumers seeking to spend some of their additional savings, and some transfer of money back to governments as taxes rise.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Pandemic savings to boost Black Friday, but what then?

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