The early evidence suggests that household consumption in OECD economies may not have collapsed by as much as many fear in March. But as the boost from food stockpiling fades, overall consumer spending will plummet in Q2. Using our new (downloadable) 22-item household spending model, the UK and the euro-zone look most vulnerable given high spending on services such as hospitality. Meanwhile, consumption in EMs like Mexico, where households normally spend a lot on food, will fall less sharply.
- The early evidence suggests that household consumption in OECD economies may not have collapsed by as much as many fear in March. But as the boost from food stockpiling fades, overall consumer spending will plummet in Q2. Using our new (downloadable) 22-item household spending model, the UK and the euro-zone look most vulnerable given high spending on services such as hospitality. Meanwhile, consumption in EMs like Mexico, where households normally spend a lot on food, will fall less sharply.
- The available data so far clearly show that the lockdowns have dealt a heavy blow to consumer spending. In March, US retail sales fell by 8.7% m/m and Visa transactions data painted a similarly bleak picture in the UK. Things could have been worse if it wasn’t for consumers rushing to stock up on essential items. After all, food sales rose by about 25% in the US, partly offsetting sharp declines in almost every other area. (See Chart 1.) The global sector PMI also showed that food, drinks, and pharmaceuticals fared much better last month. (See Chart 2.) So, sales of such staple goods will probably cushion the blow to the headline retail sales figures for March in other DMs, which are scheduled for release in the next couple of weeks.
- But once households’ cupboards are full, spending on essential items will normalise. Indeed, timely data for the Netherlands show that supermarket sales have already dropped back in April following a spike last month. (See Chart 3.) And given that containment measures in most economies only took effect in mid-late March, the consumption data will be uglier in Q2.
- Of course, consumption will fare less badly in some countries than others since spending patterns vary. The biggest areas of household consumption tend to be food and drink, vehicle fuel, recreation and hospitality. (See Chart 4.) But there are important differences at the country level. For instance, US households spend a lot more on healthcare compared to the OECD average, while consumers in less developed economies spend a greater amount on essential goods such as food. With these areas of spending likely to hold up fairly well, all else equal, these countries will see smaller declines in consumption. But with a large share of spending on luxury services in many European countries, the hit there will be greater.
- To get a handle on where household spending is more vulnerable to the lockdowns, we’ve developed an excel model that shows how spending patterns will affect household consumption in different countries. It uses the same framework as the GDP-by-sector model we published recently. (For more information, see here.) Clients can download the household expenditure model by selecting the xlsx option from the drop-down download button at the top of this page to create their own scenarios.
- Leaning off the data we have so far, we have come up with a shock scenario for OECD consumer spending during the lockdown. The different spending items fall into three broad categories: those heavily affected by the lockdowns, such as hospitality and transport services; those that are less directly exposed but will nonetheless get caught up in the crossfire, such as rent and household maintenance expenses; and, finally, essential goods and services such as food, utilities and healthcare which will hold up better.
- In keeping with our GDP forecasts, in this scenario, the euro-zone and the UK see the sharpest falls in consumption. (See Chart 5.) After all, many European countries spend a lot on hospitality and very little on healthcare. Meanwhile, emerging economies tend to see smaller hits to consumption given that a larger proportion of spending goes on food and drink and much less on recreational goods and services.
- Some of the worst hit areas of spending could be some of the latest to recover once the lockdowns are over. Hotels, bars, and restaurants will probably be among the last to see restrictions lifted. And even when they are, consumers might be slow to start booking holidays or get back to hitting the nightclubs. Again, this is likely to hit European countries hardest given their higher exposure to discretionary services.
Chart 1: US Retail Sales (%m/m)
Chart 2: Global Sector PMI
Chart 3: Netherlands Supermarket Sales (% w/w)
Chart 4: Breakdown of Household Final Consumption Expenditure in OECD Economies (%)
Chart 5: Direct Impact on Real Household Final Consumption Expenditure (%)
Sources: Refinitiv, OECD, IHS Markit, Capital Economics