Can consumers drive the post-Covid recovery?

The global economy suffered its worst performance since the Great Depression last year. A slump in household demand was a key element of the contraction as lockdown restrictions were implemented. However, there are increasing hopes that the reopening of economies and unleashing of pent-up demand will generate a powerful consumer-led recovery.

Steady personal incomes and cash hoarding
Despite the dramatic fall in output last year, personal incomes have remained relatively steady during the Covid-19 pandemic. Household balance sheets were stabilised by government job retention schemes, extended unemployment benefits and stimulus cheques. Consumers in the world economy are estimated to have accumulated excess savings of nearly $5.4 trillion according to credit rating agency Moody’s data.

There are three major reasons why the cash hoard has developed. Firstly, forced savings: the closing of nonessential retail, as well as travel and leisure options, stopped consumers’ ability to spend their money even if they wanted to. Secondly, higher precautionary savings: nervous consumers have been concerned about rising unemployment so have been increasing their financial safety net. Thirdly, the fiscal transfer: the rise in household savings is the counterpart to government deficits.

Rising consumer confidence
Improving sentiment surrounding vaccination programmes, the reopening of the services sector and the flow of fiscal stimulus has been reflected in recent retail sales and consumer confidence data. In the UAE, 74 per cent consumers are increasingly optimistic that the economy will recover in two to three months and become as strong as or stronger than pre-coronavirus days, according to a recent consumer sentiment survey by McKinsey & Company. However, it is noted that their overall spending remains low.

Risks to the consumer recovery
There are still reasons why households may hold their money for a while longer. More cautious households might use the money to pay down debt or increase their safety net until the pandemic finishes or labour market conditions improve. If coronavirus variants reduce vaccine efficacy rates and the recovery starts to stall, then consumer confidence could quickly deteriorate again. Encouraging growth prospects Moody’s estimates that the global figure for additional savings since the pandemic is more than 6 per cent of gross domestic product. If consumers were to spend a third of that, it would boost global output by two percentage points both this year and next. Barclays Investment Bank forecasts that private consumption in the US will grow 8.1 per cent this year, helping to propel growth in the world’s largest economy to above 7 per cent in 2021.

We are of the view that the global vaccination programmes will help to arrest the virus, central bankers will look through any short-term spike in inflation and labour markets will recover (albeit at an uneven pace). Consequently, consumer confidence should continue to improve and support growth prospects.

Sectors where consumers are likely to spend
When trying to capitalise on the global consumers’ war chest, investors may gravitate around the consumer discretionary sector. However, globally, this sector has already doubled from its pre-pandemic levels, raising questions as to where opportunities might lie. Starved of spending opportunities, consumers are now set to hit the high street, however, sectors likely to prosper may not be those that have suffered most.

With most households confined to home and so less likely to consume services, it is not surprising to see online retailers, home improvement stores and luxury companies being the main contributors to this outperformance. On the other hand, many companies exposed to the travel and leisure industry, including restaurants, have lagged significantly. With economies reopening, international travel gradually resuming and consumers starting to spend more on services, these would appear to be well positioned to benefit. On the goods side, apparel will most likely enjoy the strongest rebound as consumers feel the need to buy clothes again.

Focus on balance sheets, not price charts
For all the opportunities in the recovery, we don’t think the market has missed something here. The fact that the shares of many travel-exposed companies remain well below their pre-pandemic level is, in part, justified as many had to raise capital, either equity or debt, to survive over the past twelve months. As a result, while revenues and profits for travel-exposed companies may recover relatively quickly, the shift in their capital structure probably justifies lower valuations. In this context, it could be important for many investors to proceed with caution and avoid bottom fishing. Finally, in case consumers decide not to spend but to invest, asset managers could profit.

Henk Potts is market strategist EMEA and Julien Lafargue is the chief market strategist at Barclays Private Bank