How much will lifting lockdown start to reverse the UK’s economic slump?
Preliminary data suggest that the dramatic fall in UK consumer spending preceded the introduction of lockdown and social distancing in March. Will this fall in consumption reverse as lockdown restrictions ease – or persist because of subdued consumer confidence?
Initial evidence suggests that consumer spending in the UK began to decline before social distancing policies and legislative lockdown measures were introduced in the second half of March. An implication of this is that an easing of the domestic lockdown may not result in the resumption of normal consumer behaviour as long as there are substantive fears of catching Covid-19 during economic activity, as long as there is chronic uncertainty about the future state of the UK economy, and as long as the rest of world remains in a slump.
How did lockdown affect the economy?
On 23 March, the UK government announced nationwide lockdown measures. In the weeks leading up to this announcement, government action had mainly taken the form of gradually strengthening guidance on public gatherings and travel, with social distancing advice in place from 16 March.
Lockdown measures mechanically cause a significant fall in economic activity because fewer people are going to work, which affects supply, and fewer people are shopping, dining out or otherwise contributing to demand. Furthermore, a significant portion of the labour force cannot work sustainably from home.
That said, independent of government-mandated restrictions, the public may have reacted to reduce economic activity of their own volition. Fears of catching Covid-19 from any economic activity that required face-to-face interaction, plus uncertainty about the future state of the economy, may have led to reduced economic activity even in the absence of government legislation.
Related question: Why is uncertainty so damaging to the economy?
Determining which of these two factors was chiefly responsible for the decline in UK consumption going into lockdown is important for predicting how the UK economy will respond as lockdown measures are gradually pared back. To the extent that fear and uncertainty are likely to be pervasive – and if they contributed substantially to the initial consumption fall – then easing lockdown restrictions may not cause a material recovery in consumption.
What is the evidence?
Figure 1 shows the average weekly expenditure for total spending excluding rents and recurring bills over the weeks from early January to late April for both 2020 (orange line) and 2019 (blue line) in the UK (Hacioglu et al, 2020). The time series for both years have been normalised to 100 in the second week of January of each year.
The vertical red line coincides with 23 March, when the nationwide lockdown measures were announced.
Figure 1 shows that the drop in consumer spending occurred earlier than the introduction of lockdown measures on 23 March. Indeed, the fall in household expenditure started prior to the guidance issued by the government to not visit pubs, restaurants and cinemas on 16 March.
In fact, around half of the fall in total spending from February took place before official lockdown measures were introduced; an even greater share of the decline in services spending occurred before the official measures.
Figure 1: Average weekly household expenditure in the UK, excluding recurring bills
Source: Hacioglu et al (2020)
Notes: normalised to 100 in the second week of January.
While the evidence in Figure 1 is only suggestive, it does point to fear and uncertainty being substantial drivers of the fall in consumption. Of course, this does not mean that the lockdown measures per se had no effect at all on consumer spending and there is evidence supporting a significant role also for lockdown measures (see, for example, Carvalho et al, 2020, for Spain).
The evidence in Figure 1 suggests that fear and uncertainty may play an equally, if not even more, important role in explaining the drop in aggregate demand. This is corroborated by research on consumer expenditure in other countries:
- One study that compares the experience of Denmark (a country that went into full lockdown) with that of Sweden (a country that did not formally impose any stringent lockdown measures) finds that that the decline in household spending was comparable across countries. Danish households cut their spending by about 30%, while Swedish households reduced theirs by about 25% (Andersen et al, 2020).
- Data from Ireland show a similar pattern. According to the Central Bank of Ireland, card spending in March had already declined by one-fifth prior to the stay-at-home order announced on the 27th of that month (Hopkins and Sherman, 2020).
- In the United States, research shows that spending has remained stubbornly low in states that have already re-opened. Furthermore, consumption has not risen faster in states that have decided to re-open earlier, suggesting that relaxing lockdown measures will provide little, if any, support for the ailing consumer sector (Chetty et al, 2020).
What does this mean for policy?
Data from the UK represent prima facie evidence that patterns in consumer activity reflect a reaction to the crisis, and do not result only from strict adherence to the domestic lockdown measures per se.
Taking this evidence into account, and factoring in the additional drag from depressed asset prices and a slowing global economy, there is a risk that relaxing lockdown measures in the UK may not bring as large an improvement in consumer spending as might be hoped for – and certainly much smaller than the initial decline.
Related question: How do changes in asset prices affect the real economy?
That said, by reducing consumer fears about face-to-face economic activity, further reductions in the number of active cases and public health policies, increased health sector capacity, a robust testing regime and an effective track-and-trace framework may have significant economic benefits in addition to their stated public health objectives.
Related question: How should we allocate limited capacity for coronavirus testing?
Where can I find out more?
Behavioural responses during a pandemic: implications for UK economy: LBS webinar on how people will react as lockdown eases and the economy begins to restart, with Flavio Toxvaerd and Andrea Galeotti.
Consumer responses to the Covid-19 crisis: Asger Lau Andersen and colleagues summarise evidence from Denmark at VoxEU.
Tracking the COVID-19 crisis through the lens of 1.4 billion transactions: Vasco Carvalho and colleagues summarise evidence from Spain at VoxEU.
How did Covid-19 and stabilization policies affect spending and employment? A new real-time economic tracker based on private sector data: Raj Chetty and colleagues present US data.
How has the Covid-19 pandemic affected daily spending patterns? Evidence from the Central Bank of Ireland.
Consumption in the time of Covid-19: Evidence from UK transaction data: CEPR study by Paolo Surico, Sinem Haciouglu and Diego Kaenzig.
A temporary VAT rate cut may get us spending, but would it speed the recovery? Eddie Tam discusses why a temporary cute in the VAT rate will stimulate spending.
Who are experts on this question?
Authors: Tim Munday and Paolo Surico
Published on: 25th Jun 2020
Last updated on: 10th Jul 2020