Another necessary pillar for a strong recovery is a bounce back in consumer spending. Interestingly, many have forecast a spike in private savings rates across the developed world as incomes have largely been preserved, whilst expenditures have seen a much bigger collapse. In its latest Spring Forecast, the European Commission predicts that European households will save a record 19% of their income this year. Oxford Economics forecast this rate to be close to 15% in the US, where the household savings ratio has been below 10% for the last 30 years. The BOE have also noted a surge in UK bank deposits in March. It is unclear how much of this is ‘forced savings’ due to fewer spending opportunities in lockdown, versus precautionary savings stashed away in the fear
of troubles ahead. For all three of the above economies, household consumption forms the largest component of GDP (52% in the EU, 68% in the US and 63% in the UK). These governments will be hoping that the rise in savings does not form a longer-term trend.
Retail sales data in April illustrates the immediate damage resulting from the collapse in consumer spending. In the US sales were down 16.4%, almost double the figure for the previous month. In the UK, sales fell 18.4%, Canada 10% and the Euro Area, 11.2%. These economies can take at least some relief from China’s experience of reopening, where retail sales have fallen only 7.5% compared to 15.8% the month before. These data points correspond to a record drop in retail prices as much of the developed world fights deflation. US core inflation, which excludes food and energy prices, was down 0.4%, the largest one month decline since records began in 1957. The monthly change in total CPI was -0.8% for the US, -0.4% for Switzerland, -0.2% for the UK, 0.3% for the Euro Area and -0.7% for Canada.
Against this economic backdrop, markets continue to be pushed and pulled between government support packages and concerns on a spike in coronavirus cases as lockdown measures are rolled back in many economies. The market is also weighing $6 trillion of stimulus packages against the potential for a significant deterioration in earnings with some forecasters expecting a contraction of 50% this year. Nonetheless, market moves in the month reflect the view that earnings growth will recover over 2021 despite continued uncertainty on the duration of a recovery and the impact of unprecedented government borrowing. As we’ve discussed before, such swift and sizeable rescue packages were a necessity, but they come at a price. A legacy of greater debt and challenging demographics suggests global growth will remain subdued for many years. Moreover, in economies that have relaxed lockdown restrictions business activity has improved but remained tentative and a long way off pre-lockdown levels. Consumer behaviour is understandably cautious in ramping up discretionary spending given the significant risk of redundancies in sectors worst hit by the lockdown measures. Consumers will remain cautious when given the choice of returning to bars, restaurants, theatres etc. and furlough schemes are not indefinite. As furlough schemes retrench, discretionary spending will be hit with the real prospect of a further spike in unemployment.