Sunday, October 25, 2020
Consumers will stay wary as long as the virus stalks us
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

We enter a new period of uncertainty, in response to which the chancellor, Rishi Sunak, has announced another set of job support measures, which is becoming a regular occurrence. The Bank of England is heading for a Bonfire Night announcement of another £100 billion of quantitative easing (QE), which will mean almost as much of this kind of help for the economy this year as in the previous 10 years combined.

A month ago here, I wrote about the importance of confidence in driving the economic recovery. This was after Boris Johnson had announced new restrictions, including the closure of pubs and restaurants ay 10pm, following hard on the heels of the so-called “rule of six”. The confidence killer was the messaging that surrounded the new rules, that they would probably be around for six months.

Since then evidence of the Covid-19 second wave has become clearer and we have had a bitter North-South battle over the confusing three-tier restrictions, as well as a new set of support measures from the chancellor. A growing proportion of the UK population, though not yet the majority, is operating under more severe restrictions, including those introduced in Wales, Scotland and Northern Ireland.

These new restrictions came too late to affect the September retail sales figures, released on Friday. They showed a robust rise 1.5% rise in sales volumes in September, up 5.5% on pre-Covid levels in February, and 4.7% up on a year earlier. More than a quarter, 27.5%, of sales were online in September, compared with 20.1% in February. The key question, however, is what happens next.

I was right to worry about confidence, though. While not all of the latest measures will have been reflected in the surveys, consumer confidence has taken a battering. The closely watched GfK consumer confidence index, released on Friday, showed a drop of six points to -31, almost down to its levels during the national lockdown in the spring.

And, according to Joe Staton of GfK: “The prospect of rising unemployment is severely depressing our outlook. Worryingly, this data was collected before the new round of COVID-19 restrictions came into force and the end of the furlough scheme, so this will negatively impact the Index in the run-up to Christmas and the months beyond. Expect the autumn chill to give way to much stormier conditions.”

If the GfK measure is almost down to its lockdown lows, another consumer confidence indicator, from Bank of America’s UK team is even gloomier. The 28-day moving average of its index has hit a new low, thus falling below where it was in March-April this year. People are wary of making major purchases, and gloomy about pay, jobs and the impact on them of Covid-19.

Robert Wood, its UK economist, highlighted what is an important feature of the coronavirus crisis, and a shortcoming of attempts to isolate parts of the country with low infections from the economic damage. As he puts it: “This consumer reaction is larger than consistent with the direct effects of government mandated business closures.”

We all watch the same news on television and read the same newspapers, whether we are in high infection Merseyside, Nottingham and Lancashire, or low-infection Cornwall, Isle of Wight and Somerset. We all see the same downbeat Downing Street briefings and see the same national figures for rising coronavirus infections and cases.

The direct effects of even Tier 3 restrictions on the economy are small, even if they are devastating for the hospitality sector. Estimates by J P Morgan suggest that these direct effects are equivalent to 1% or less of gross domestic product. But it also cites the downside risks to this assessment as a result of changes in behaviour.

This has become one of the most important aspects of the economic effects of the pandemic, as highlighted by Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee, in a thoughtful speech a few days ago.

Looking at evidence and studies on the impact of restrictions, some of it dating back to the Spanish flu pandemic of a century ago, most more recent, Vlieghe argued that the typical pattern is one in which governments introduce restrictions, but only after virus cases have started to increase, by which time people have already started to respond to the danger by reducing their spending.

“The overall conclusion that I take away from this rapidly growing literature is that the bulk of spending reductions are due to restrictions that people voluntarily impose on themselves, not due to government imposed restrictions,” he said. “People react strongly to actual or perceived virus risk, and government measures that reduce the spread of the virus are good for public health as well as for the economy, relative to a counterfactual where the virus is allowed to spread more widely.”

That probably give the government too much of a free pass, in the sense that some restrictions that have been introduced in response to Covid-19 have had a limited effect, at best, on the spread of the virus. Countries with the best public health records have combined restrictions with effective test and trace systems.

There may also be strong feedback effects, so when the government announces restrictions that makes people even more worried about the virus, so more likely to change their behaviour. This could particularly be the case when new restrictions are accompanied by scary extrapolations from the government’s scientific advisers.

He is surely right, however, to conclude that changes in behaviour are the key driver of changes in the economy, particularly now when restrictions in most of the country fall well short of the lockdowns in late March and April.

Behaviour adapts, and it may be, as Vlieghe suggests, that people and businesses will respond in a different way to the second wave of the virus than they did to the first, though he remains downbeat, and likely to vote for more QE next month. We have to hope behaviour does change. We are entering a period when consumer spending will not longer benefit from the release of pent-up demand suppressed during the spring lockdown.

You can see that in new car registrations. In July, private new car sales were up by 20.4% on a year earlier, reflecting a combination of pent-up demand and purchases that would have happened anyway. But in both August and September private sales were down on a year earlier as this effect faded, and so far this year, private new car sales are down by nearly 29% on the equivalent period of 2019.

Can anything be done to boost confidence and thus maintain spending over the winter? After all, while the crisis has brought many people close to the edge, and suffering both a substantial drop in income and the prospect of unemployment, others are sitting on the involuntary savings accumulated during the pandemic.

For the moment, however, they are worried, and it does not help that, at the latest count, 9% of employees were on the furlough scheme that comes to an end this week. According to the Office for National Statistics, 74% of people say they are very or somewhat worried about the impact of the coronavirus on their lives, the same proportion as at the end of April.

This is where public health and economics come together. Only when the numbers and the messaging on Covid-19 are more reassuring will people feel more confident. Otherwise, it looks like a difficult winter for businesses relying on the consumer.