Cautious Consumers Could Derail the Economic Recovery if they Continue to Save More Money say Economists

- Surveys show consumer sentiment is dipping again
- Desire to save cash remains high
- For consumption-lead economies, this is a risk to economic recovery

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Economists are warning that covid-shy UK consumers could look be inclined to save more of their money over coming weeks and months, potentially jeopardising the UK's economic recovery.

While the saving of money by individuals and families is by no means a negative trait, it does have the impact of restricting economic activity, particularly in an economy such as the UK's where consumer spending is a significant engine of growth.

Rather than planning to run down savings after lockdown, consumers plan to save more according to Bank of America Securities' latest UK consumer survey.

"For a 'V' shaped recovery we would need to see those households building up savings during lockdown planning to spend those savings as restrictions are eased. Our proprietary UK consumer survey suggests, however, that people saving more during lockdown plan to continue saving more than others as restrictions ease. This suggests people saved more partly through choice rather than because lockdown restrictions forced them to. This poses a challenge to forecasts for a strong or 'V' shaped recovery," says Robert Wood, UK Economist Bank of America.

The bank's consumer confidence indicator fell this week for the first time since April with their higher frequency and more volatile 7-day average falling 8 points, the biggest one week fall since March.

The survey also finds only a gradual return to work, consistent with a 'U' or 'L' shaped recovery while Bank of America's UK consumer confidence indicator fell for the first time since April. Unemployment expectations worsened the most.

"The potential for excess saving by households in H2 remains a major risk to the recovery," says Kallum Pickering, UK Economist at Berenberg Bank.

The warning on the potential for UK consumers to sit on their earnings and savings must be acknowledged by the Government who on Wednesday will detail tax and spending changes to try and boost the economic recovery.

Given a viewpoint that consumers might be willing to sit on cash, Pickering says the Treasury should priorities spending as opposed to debt cuts.

"Debt-financed spending should be prioritised over tax-cuts, in our view. If households and firms are too fearful to spend the windfall, tax cuts may simply lead to higher saving instead of boosting demand," says Pickering.

The UK consumer is already looking to be behaving in a more cautious manner than counterparts in the U.S. and Eurozone, suggesting the impact of the covid-19 crisis on the UK's collective psychology is perhaps the biggest threat to any recovery.

The following chart from Berenberg Bank shows the retail footfall for advanced economies (% from baseline). As can be seen the UK is a distinct laggard:

The findings are concerning for an economy that leans as heavily on consumer spending as the UK does and suggests that without a boost in confidence the country faces a long road to recovery.

The findings are echoed by the UBS Evidence Lab's most recent global consumer survey on COVID which has given a similar insight to that of Bank of America into the impact of evolving consumer psychology on the recovery.

A key takeaway of the UBS research is that about 20% people will be very slow to resume normal activity even if governments give them an "all clear".

"Particularly concerning is that more respondents (at 42% vs. 33%) expect the economy be worse rather than better in 6 months for the first time since mid-May," says Stuart Kaiser, Strategist with UBS.

The spike in covid-19 infections in the U.S., as well as persistent media reports of emerging outbreak bubbles in China and Europe are also concerning. However, there is also a potential realisation amongst consumers that unemployment will inevitably rise, particularly in the UK where the Government has announced their flagship job protecting furlough scheme will end in October.

The Bank of America survey meanwhile continues to find only a gradual return to work consistent with a 'U' or 'L' shaped recovery.

Also consistent with a slow recovery is their survey finding that a return to work does not mean a return to normal. As the number of people on furlough falls the number being laid off or suffering pay cuts rises.

"Several studies show personal choices matter as much as rules to spending behaviour. Our survey finds consumers split roughly 50-50 over whether they are comfortable or uncomfortable shopping and working as normal, suggesting some people will be more cautious than others as lockdown rules are eased, weighing on the recovery," says Wood.