Consumption spending in the wake of the pandemic

This briefing note compares trends in output, consumer spending and saving from the 2020 recession with those from two previous recessions beginning in 1990 and 2008. It also draws on individual-level data collected during the pandemic. Three facts suggest that savings built up during the pandemic are more likely to be drawn down slowly than quickly: (i) falls in spending during this recession were primarily in purchases of services rather than durable goods (durables purchases being both easier to postpone and less likely to be smoothed over time); (ii) increases in net wealth over the pandemic were more common among higher-income households, who were less likely to experience economic uncertainty and income losses during the pandemic, and so are less likely to change their spending behaviour as the economy recovers; and (iii) survey questions on how individuals would respond to a hypothetical payment suggest low propensities to spend out of income growth.

Key findings

1. The recent recession was untypical in a number of ways. It stands out relative to previous recessions in that purchases of services fell far faster than purchases of various types of goods. Purchases of services fell by a dramatic 30% relative to pre-recession levels, compared with a decline of just 4% at the equivalent point following the 2008 financial crisis.
   
   
2. There were also large increases in the household saving rate, which remained high in the second quarter of 2021 (at 18%). Net wealth increases over the pandemic were more common among individuals who had greater long-run incomes, who also tended to be less affected by economic uncertainty during the pandemic. These individuals are more likely to draw down accumulated savings slowly as the economy recovers.
   
   
3. Responses to questions on how people would respond to a hypothetical payment of £500 indicate low propensities to spend. On average, only 11% of the value of these payments would be spent over the next three months in March 2021, suggesting the appetite to spend out of income growth is not unusually high. Richer households are more likely than poorer households to report they would add to their savings. Poorer households are more likely than richer households to report they would reduce their debts.
   
   
4. Consumption growth in the next few months is still likely to be rapid, and to be accompanied by additional inflation. This would be expected as demand and household saving return to pre-pandemic levels and firms have to adjust to new spending patterns. However, the fact that additional savings accumulated during the pandemic are likely to be drawn down slowly limits the degree to which consumer spending will drive both the recovery and inflation in future.