Fear - The Underlying Economic Threat of Coronavirus

The UK’s first national lockdown for coronavirus started on March 16th 2020, with measures beginning to be alleviated from the 4th July. During this period the UK experienced its largest recession on record with a 20.4% drop in GDP across the year’s 2nd quarter. Since then, there have been 2 further lockdowns, with the current one not expected to end before March at the earliest.

Lockdown has been a major cause of the recession. Telling people to stay home whilst shutting down non-essential shops has and will continue to impact UK GDP in the short run. However, the long-run effects on the economy are arguably more concerning. During 2020, despite slight differences in their economies, Sweden experienced a 25% drop in spending, compared to that of Denmark who saw a 29% drop despite only the latter going into lockdown.

This comparison highlights the growing viewpoint that lockdown itself may not be as big of a threat to the economy as long-term consumer confidence will be.

The ‘Paradox of Thrift’ is a theory that households save more during recessions due to uncertainty, leading to an even greater reduction in consumption. This is prominent in the current climate, with savings on disposable income rising to 29.1% in Q2, more than double the previous record high. Whilst a lot of this will be due to the inability to spend money, fear and uncertainty undoubtedly have had a major effect.

Consumer expectations are essential to the future health of an economy, with uncertainty a major staller of consumption and investment. The tier system set in place on December 2nd, following the second national lockdown, enhanced already unstable households. Many regions had new restrictions announced with less than 24 hours’ notice, the South West going from tier 2, to tier 3 to tier 4 within a week.

Forbes stated that, “Fear and anxiety are major influences on behaviours under any circumstances, but this is exacerbated by the current crisis”.

There are 2 kinds of fear playing on consumers’ minds. First, is the fear of catching the fast-spreading virus, and second are the financial fears of an uncertain future. Both are likely to have unprecedented impacts on the economy and its recovery in the coming years.

In July 2020, following the loosening of lockdown measures, 4 in 10 consumers chose not to go back out despite it being legal, emphasising peoples fear of catching the virus. New discoveries on the impact that “long Covid” can have on completely healthy individuals only adds to this fear, in particular with the more risk-tolerant younger generation, again impacting overall spending.

Consumption accounted for 62% of GDP in 2019. If, despite the lowering of restrictions, consumers are afraid to return to shops, consumption and the economy, will continue to suffer. 9.3 million people have received the first vaccine, but there is a long way to go before many people will feel safe enough to go back to their usual spending patterns.

From a financial side, continuous extensions of coronavirus restrictions have led to economic fear spreading like wildfire. Many consumers are, rightfully, fearful of losing their jobs and sources of income which are needed to support already restrained lifestyles. With unemployment now rising to 5% in late January 2021, and the number of credit-constrained households on the rise, these fears will continue to grow. The knock-on effect on the economy is simple when people are fearful, they stop purchasing expensive and non-essential items, seen by 46% of UK consumers saying they postponed “big-ticket purchases” during the initial lockdown.

The future does not look overly promising for the young generation with borrowing during this period exceeding that of WW2. Millennials were dubbed the first generation who wouldn’t out-earn their parents, with already credit-constrained lives followed by significant increases in tax rates in the future this only cements their fate. Financial fears from coronavirus are significant and will continue to remain a thorn in the economy’s side long after the virus is gone.