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The Great Consumer Spending Rotation


Posted: Saturday, May 29th, 2021

Estimated Reading Time: 3 minutes

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The COVID-19 pandemic triggered an unprecedented reaction from policymakers around the world. Central banks and governments alike have delivered monetary and fiscal stimulus at the same time, flooding the financial system with cheap money.

Since last November, when vaccine efficacy was made public, humankind started to see the light at the end of the tunnel. Households sat on a pile of savings ready to be deployed into the economy, and businesses began investing for the long run.

Fast forward to May 2021, and the households’ savings rate remains elevated in most of the developed world. However, consumer spending rotation toward services has begun, signaling a return to normalcy in rich countries.

Consumer Spending

Business investments look rosy too. According to Morgan Stanley, by the end of 2022, the global investment will soar to 121% of pre-COVID-19 levels. This is in sharp contrast to what happened after the 2008-2009 Great Financial Crisis. Back then, it took global investment more than two years to regain its peak in real terms.

Strongest Consumer Spending Growth Since WWII

Real consumption growth willreach 10% this year, the strongest performance since 1946. Households’ finances remain very healthy, as shown by the real disposable income sitting at 9% above its pre-pandemic level.

Excess Savings

Put it simply, the world’s consumers sit on a pile of cash, ready to be deployed in the real economy. It is estimated that households have stashed about $3 trillion in excess savings due to the pandemic, much more than anyone would have anticipated.

This is in sharp contrast with other recessions, but only because the COVID-19 pandemic triggered a unique economic contraction. The problem came from two sources. First, the pandemic triggered an economic recession all over the globe, sparring no economy. Second, policymakers reacted at the same time, throwing vast amounts of money to help households and businesses.

Services Lag the Overall Spending Recovery

It is estimated that the rich world has spent over 5% of its combined GDO on unemployment benefits, stimulus cheques, or furlough schemes. In the year following the full economic reopening, it is expected that consumer spending in America will add about 2% to the GDP. While it is too early in the economic recovery, consumer spending shifts toward the services area – a healthy and welcomed sign.

Despite stronger than expected economic growth and a strong bounce on consumer spending, governments and central banks remain accommodative. In the United States, the enormous fiscal support provided a 40% rise in income for the poorest families. The Fed still buys $120 worth of asset purchases every month, and the US administration goes on a spending spree. For example, the fiscal budget for the fiscal year 2021, announced recently, exceeding $6 trillion. Moreover,  it will exceed $8 trillion by 2031 in an effort to rebuild the infrastructure and fund climate change projects.

All in all, consumer spending is back and roaring. The faster the services sector recovers, the bigger the impact on GDP.

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