Edging out of lockdown

As the Federal Reserve confirmed this week, even as lockdown measures are eased, it will take time for consumer activity to return to pre-virus levels.

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  1. Charles Stanley

This week we have been warning of the growing gap between equity-markets levels and where economies and many companies currently are. We drew attention to the big rise from low levels in the shares of companies really struggling in current conditions – and explained why we did not trust that.

On Thursday, Wall Street administered a sharp correction hitting, in particular, the shares in sectors and businesses damaged by the pandemic that have been chased-up for no good reason other than the tsunami of money that has overwhelmed markets.

The money created by the Fed and other Central Banks has not just found its way into bond markets. It has also through state programmes and the impact of lock down popped up in many individual bank accounts.

Saving for rainy days

In the UK, as elsewhere, private savings have shot up. Whilst too many people have lost their jobs and suffered an income fall, the majority have kept their salaries but have stayed at home. They have not been able to spend on entertainment and leisure, shop based discretionary retail, on meals at work, on travel and the many other items of their daily budgets that lock down has stopped. As a consequence, their cash balances have been increasing. Few new homes or new cars have changed hands, slashing expenditures on big ticket items. The people who have lost their jobs tend to be the lower paid.

The recently published aggregate figures show savings as a percentage of disposable income soared to 30% in the UK from 5% before the lockdown. In March and April, overall bank account balances went up substantially. Individuals repaid £11.2bn of personal consumer debt and ended up with £11bn more saved than before.

Some have taken advantage of more time at home to cut their broadband and energy bills by going onto the switch sites, giving savings a further boost. As we come out of lockdown, spending will bounce considerably. Whilst entertainment, leisure, travel and hospitality spending will still be subdued, it will be a lot higher than in the period of bans. More people will probably lose their jobs, and others worrying about the security of their employment will want more savings as a precaution. Some consumers, especially the elderly and vulnerable, will lack confidence to go out and spend as they used to for fear of the virus.

A matter of confidence

Confidence will be a more important issue than cash for the typical consumer. A minority have been sceptical about the potency of the virus for people other than the elderly and ill. They have been frustrated at home, pushing the boundaries of the permitted. They will want to return rapidly to bars and restaurants, foreign travel and entertainment.

At the other end of the spectrum many elderly and vulnerable people are scared of the pandemic and will not wish to rush out or put themselves in harm’s way in crowds. They will not be booking Saga cruises or seeking a coffee in a busy store anytime soon, even if they do want to hug the grandchildren.

The average consumer is respectful of the virus and will take time to get back to normal levels of activity where crowds are involved. All the time social distancing rules are in place, whether two metres or one, there will be a limit on how far the recovery in spending can go in the hospitality and tourism areas.

The build of cash by people mirrors some of the large fall in cash by business. The money people saved would previously have been spent on business goods and services. This has led to the cancellation of much investment spending by business, and large falls in business to business purchases as their customers have disappeared.

Business has been assisted by furlough and part-time working schemes in some European countries, and by a surge of loans to keep them going. They now have to work out how to adjust their businesses to the relaxations.

Shop chains may choose to open stores in a staggered way. They will all have to limit numbers of people entering and circulating – and will need rules over handling goods and trying on clothes that allows them to keep enough stock on display. Cafes and bars will need strict limits on numbers and may need screens between family groups of customers. For each customer-facing business it means fewer customers, less revenue, and more cost in controlling movements and access. Hospitality venues with gardens will bring the outdoors into more prominence to expand their trading space. This may need investment in umbrellas, heaters and new tables.

It will take time

As the Fed revealed, it is difficult to forecast a return to 2019 output and income levels by the end of next year. With the OECD saying France, the UK and Italy will fall by more than 11% this year, it means they need to grow by more than 12% next to get back to where they started. Companies that have lost half their profits this year need a 100% rise in profits next year to regain their initial level.

We expect some spectacular growth rates for output and profits for businesses that were locked down, as any company that stopped getting revenue will clearly rush ahead from that dire base. It does not mean they can recover fully and quickly. Governments are mainly being cautious in the pace of relaxation and do not wish to remove the all-important social distancing provisions which make such an impact. This will hold back business – and will also hold back consumer confidence. It is only all that cash that is sustaining markets.

Every single day equity markets sustain these levels they underwrite very high ratings for shares in companies struggling to get back to work. It will need more consumer confidence to resolve the underlying problems and further relaxations of controls.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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