So much cash was saved in lockdown, but now consumers appear reluctant to part with it. Paul Jones reports
When people are in a good mood — that’s when Stefano Vallebona reckons his Italian delicatessen performs best. So when the Sardinian, who has lived in London for 25 years, observes that the well-heeled customers of his shop in Wimbledon are spending less than they were when the country came out of lockdown, it could be an ominous sign.
“Everybody is super cautious — there’s lots of uncertainty,” said Vallebona, who had benefited from buoyant trade when Covid-19 restrictions were in place and customers were splashing out on his luxurious food and drink items to enjoy at home. For now, though, that trade seems to have passed. “I don’t think people are celebrating anything at the moment,” said Vallebona, 54, who runs the business with his wife, Naoko.
His experience reflects the findings of recent surveys showing that consumer sentiment has dipped in recent weeks after the outbreak of euphoria when lockdowns were lifted and consumers could once again visit pubs and clothes shops.
The Bank of England has noticed too. When Andrew Bailey, the governor, stunned the financial markets on Thursday by announcing that interest rates would remain at their record low of 0.1 per cent, he pointed to signs of weaker consumer spending as a reason to delay the expected hike to 0.25 per cent.
Hopes have been resting on consumers to power the economy out of its deepest contraction in 300 years, as Covid restrictions eased. During those lockdowns, households amassed savings because, with shops and restaurants closed and holidays thwarted by travel restrictions, they could no longer spend in the usual way. According to the Office for Budget Responsibility (OBR), the government’s independent fiscal watchdog, those “excess savings” — the total in people’s bank accounts above normal — amount to £180 billion, or an average of £6,474 per household.
As the harshest of Covid restrictions came to an end this spring, the Bank of England and the Treasury wanted to persuade the public to start eating into their savings. Spend, spend, spend was the rhetoric. As Andy Haldane, then chief economist at the Bank, said in March: “I very much want as much of that to be spent as possible, because that’s what creates the jobs for those who might have lost their jobs.”
It has not yet happened. In fact, deposits with banks and building societies and cash saved in National Savings & Investments accounts rose by £9.4 billion in September, nearly twice the £4.8 billion average increase in the two years before the pandemic, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Rob Wood, chief UK economist at Bank of America Merrill Lynch, said it had to be assumed that the public was now saving by choice. And that could be a troubling behavioural trend when it comes to spending longer term. “It’s not the picture you’d want to see if you were really positive on consumption growth driving the economy next year,” Wood said.
The OBR assumes that households will spend 5 per cent of these extra savings each year for five years; the Bank of England assumes 10 per cent will be spent over three years. “Whether consumers spend this money or not is central to whether the Bank needs to hike interest rates. If households keep saving at this rate, the Bank does not need to hike rates,” Wood said.
So the motivation of consumers is now facing scrutiny to establish when they might stop building up their savings and splurge the cash again, or to gauge whether the habits developed during the lockdowns will persist.
Charlotte Duke, a partner at the consultancy London Economics and a behavioural economist, said that spending habits changed during the pandemic, with more shopping online and less spending in, for example, restaurants and high street shops. And now, she added, those habits are changing again.
“Cautious spending” is now her description — caution about our financial security, but also about the way in which we live our lives more generally, having been through the collective shock of the pandemic.
“As lockdown eased — we’re social beings — we wanted to be with people, so we saw an increase in our spending behaviour,” Duke said. “But as we settle back down again, and perhaps learn to live with Covid, we’re also now in a broader world of uncertainty. It’s not just Covid — it’s climate change, it’s energy prices, Ii’s healthcare … We will continue to be cautious.”
That is why she thinks that the drawdown in savings predicted six months ago will not take place — at least for now. “What we’re seeing is uncertainty over things that we don’t really have control over,” she said.
The picture might also be muddied by the peculiar shape of the economy as it pulls out of the Covid-induced downturn. The rate at which people save usually goes up in recessions, said Simon French, chief economist at the investment bank Panmure Gordon. That’s most probably because people are concerned about their jobs.
But, for the moment at least, job losses are not mounting. In fact, as the Bank of England pointed out on Thursday, the unemployment rate actually fell to 4.5 per cent in the three months to August — and the number of people on payrolls has been rising. “I wonder whether, having started saving at a faster rate, households have just, dare I say, got into the habit of it,” French said.
In July 2020, as the economy was reopening for the first time, Peter Levell, at the Institute for Fiscal Studies, and fellow researchers tried to find out how the pandemic was affecting people’s attitudes to spending. They asked the public how they would behave if they were given an additional £500. The answer was that they would spend an average of just £50. Perhaps surprisingly, there was little difference in the responses from those on high incomes or low incomes.
What was different was what they would do with the remaining cash. Levell said those on low incomes were more likely to say they would pay down debt — 26 per cent gave this answer. Of those who were well off, 76 per cent said they were more likely to continue to save rather than pay off their debts — mortgages, perhaps.
From Levell’s point of view, this was not necessarily bad news for the economy. “Economic theory suggests that people want to smooth their spending over time, rather than blowing their new savings in one go,” he said.
Businesses, though, do report some signs of extravagance. Gordon Ker, 35, who has three steakhouse-style restaurants called Blacklock in London, said he wondered whether some “revenge spending” was taking place, where consumers make up for the time lost during the pandemic or even perhaps fear another lockdown. “People are spending a bit more than they were — spending a bit more on alcohol than they might have done or having the starter where they might not have done,” Ker said.
At the luxury end of the market, Alex Rayner, 42, chief executive of Braxted Park estate in Essex — once home to the Countess of Pembroke and the former head office of the electronics giant Plessey — said wedding bookings had become more lavish as customers had more time to plan their special occasion in lockdown. Until last week, however, he had not sold out the 12 formal party nights he holds in the run-up to Christmas, where he dishes out 300 turkey dinners a night. Usually he would sell out in June.
“I have just sold out for Christmas,” he said gratefully. “The consumer appetite for getting back to normal is back.”
In Wimbledon, Vallebona is also hoping for an improvement in consumer sentiment for the festive season. He has his panettone at the ready. “I’m optimistic. We’ve got our warehouses full. We’re ready. Christmas is going to be great.”