<link rel="alternate" hreflang="en-us" href="https://www.prudentialprivatecapital.com/perspectives/issue-focus-the-effect-of-coronavirus-on-consumer-spending"> <link rel="alternate" hreflang="en-gb" href="https://www.pricoaprivatecapital.com/perspectives/issue-focus-the-effect-of-coronavirus-on-consumer-spending"> <link rel="canonical" href="https://www.pricoaprivatecapital.com/perspectives/issue-focus-the-effect-of-coronavirus-on-consumer-spending" />
We are excited to introduce ourselves to you and our unique way of working together. In order to provide you with the optimal experience, how would you describe yourself?
Our website requires features that may not be fully supported by your current browser. Please try an other one.
May 4, 2020

Issue Focus: The Effect of Coronavirus on Consumer Spending

The effect of coronavirus on consumer spending

The coronavirus is set to have a very large negative impact on global consumer spending. Over 40% of consumer spending in advanced economies is linked to ‘social situations’ and is vulnerable to lockdowns and other social distancing. Some of this spending will be delayed, and some lost entirely. The extent of the losses depend how long restrictions stay in place. Our baseline forecasts look for a fall in consumption of 5.5% in the EU 2020, with GDP declining around 5%. With longer lockdowns annual declines in consumption and GDP could easily exceed 10%.

The coronavirus is set to have a large negative impact on world growth, with particularly big effects on consumer spending. This is because a large share of consumer spending normally takes place in crowded areas and other ‘social situations’. This spending is therefore highly vulnerable to people avoiding crowds due to health concerns and to lockdown policies which close shops and transport systems and keep people at home.

Especially at risk is ‘discretionary’ spending in sectors like recreation and culture, hospitality, and transport. These sectors account for over 40% of consumption in the UK (Chart 1) and similar shares elsewhere in Europe. The likelihood is that a large chunk of spending in these sectors will either be postponed or lost altogether as a result of the pandemic. For example, new car purchases or clothing purchases are likely to be delayed, while public transport journeys related to work and much spending on restaurants may be lost altogether.

High frequency data already point to very large declines in spending in these vulnerable sectors. Restaurant spending in the advanced economies has collapsed almost entirely, airlines have seen demand dry up and Citymapper data shows a massive slump in urban movements across Europe – of 90% or so in most cases – which in turn points to a collapse in discretionary spending (Chart 2).

What might the aggregate impact on consumption be? We can estimate this if we adapt the framework and assumptions used by Keogh-Brown et al. in their study of the economics of flu pandemics. They assume consumer spending on ‘core’ areas such as food and drink and utilities is relatively unaffected while for discretionary sectors like clothing, furniture, hospitality, transport, and recreation large shares of spending – between 50% and 100% - are either postponed or lost (Table 1).

To get an estimate of how much consumer spending might decline over different time horizons, we then need to flex a number of other assumptions such as the duration of lockdowns, the pattern of recovery in spending after outbreaks come under control, and (crucially) the ‘consumer shock factor’, i.e. the share of consumers whose behavior changes. The stricter the lockdown, the higher the latter will be.

Even relatively short-lasting lockdowns produce quite large effects. A three-week lockdown affecting 50%-90% of a population would cut consumer spending in the three-month period featuring such a lockdown by 5%-8%, a six-week lockdown would lower it by 9%-16%, and a 12-week lockdown would slash it by 18%-32% (Table 2). With consumption typically 70% or so of GDP in advanced economies, GDP impacts would also be very large.

Full-year effects depend both on the length of lockdowns and on how quickly postponed consumption recovers after restrictions ease. Most models, and the evidence from past outbreaks (e.g. SARS), suggest much of the postponed consumption reappears quickly, i.e. in the quarter after outbreaks are contained. But even fairly quick recoveries can still imply big full-year losses. In some stylised scenarios, an initial 18% slump in consumption still implies a full-year loss of 9%, even if spending recovers to pre-pandemic levels after four  quarters. If the recovery takes eight quarters, the full-year loss is an enormous 14% (Table 3).

Consumer spending may also be negatively affected by the financial market effects of the coronavirus outbreak. Since mid-February, European stock markets have dropped sharply in value, by 20-25%. This may generate negative wealth effects whereby households spend less and save more to rebuild balance sheets (as in Japan in the 1990s). Such effects might even stretch years into the future unless markets rebound dramatically.

Another risk is from ‘second-round’ effects relating to layoffs and business failures. Early data already point to steep rises in unemployment in  the US and UK, which will lead to reduced consumer incomes and spending in affected groups. This underlines the importance of effective government schemes to backstop consumer incomes and tide businesses over.

Set against these negative effects, there will be some positive offsets. It appears likely that consumption of home delivered goods, online entertainment such as video games and film and TV streaming services may rise. But these additional purchases will be swamped by the deep declines in spending already seen in discretionary sectors.

Taking all these factors into account, our baseline forecasts predict a decline in consumer spending in the EU of 5.5% in 2020. The impact is concentrated in Q2 where we expect to see around a 10% quarter-on-quarter drop. This translates into a forecast GDP decline of just under 5% for this year. This assumes the outbreak comes under control during May and June, with consumer spending then staging a strong rebound in Q3 and Q4 of this year (Chart 3). But as our scenarios earlier showed, should the virus take longer to contain, it is easy to see consumer spending (and GDP) dropping at a double-digit rate in 2020.


This article represents the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. It is for informational or educational purposes. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. In providing these materials, PGIM is not acting as your fiduciary.
Pricoa Private Capital (`PPC') is a trading name of PGIM, Inc. (`PGIM'), the principal asset management business of Prudential Financial, Inc. ('PFI'). In the United Kingdom (UK), and various other jurisdictions in Europe, certain investment activities are undertaken by PGIM Private Capital Limited, authorised and regulated by the Financial Conduct Authority (registration number 172071). PGIM Private Capital Limited is registered in England No. 1331817. The registered office is Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR. PPC, Pricoa, PGIM and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide. PFI of the United States is not affiliated with Prudential plc, a company incorporated in the United Kingdom.
©2020, Prudential Financial, Inc. and its related entities.
This update was researched and written by Oxford Economics, 121 St. Aldates, Oxford, OX1 1HB, England, as of 3 February 2020.

Pricoa Private Capital (‘PPC’) is a trading name of PGIM, Inc. (‘PGIM’), the principal asset management business of Prudential Financial, Inc. ('PFI'), and it is also a trading name of PGIM Private Capital Limited and PGIM Private Capital (Ireland) Limited. In the United Kingdom, information is issued by PGIM Private Capital Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Private Capital Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 172071) and registered in England No. 1331817. In the European Economic Area (“EEA”), information is issued by PGIM Private Capital (Ireland) Limited with registered office: Pramerica Drive, Letterkenny Business and Technology Park, Letterkenny, Co Donegal, F92 W8CY, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Private Capital Limited in reliance of provisions, exemptions or licenses available to PGIM Private Capital Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Private Capital Limited and/or PGIM Private Capital (Ireland) Limited to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).