By Tony Samson
ALREADY, our mind is on the post-quarantine scenario (already real in many places) now referred to as the “new normal.” There are designated winners (agribusiness, food manufacturing, furniture for social distancing) and losers (travel, cruise ships, oil, massage parlors).
Given the high percentage of consumption as a component of GDP, 74% for us in 2018, an important variable in any recovery scenario is consumer behavior. What will the consumer do after being released from… home? Will she go back to her old habits of spending future income with credit cards? Is window shopping putting enough social distance with the mannequin?
In economics, the theory of the “wealth effect” states that when the values of asset classes like stocks and property are rising, there is the feeling, among the invested classes, of growing wealth which leads to a higher propensity to consume. This behavioral state does not depend on taking actual profits by selling the assets and monetizing them. The rise in paper wealth is enough to trigger behavioral change. Thus a stock or property boom usually translates into higher car sales and record breaking prices for contemporary art in art auctions.
The two-month lockdown has caused the cessation of much economic activity like travel, malling, shopping (except for food and health care), dining out, and foot massage. It also deprived income for those in these businesses. Does this drop in economic activity and the loss of revenue for the small business owner of barbershops and waxing salons translate into a new mindset?
Add to this the drop in value of stocks, delayed construction of condos and hotels, possible shuttering of small businesses, loan delinquencies, and an overstretched public budget from social amelioration funding and stimulus packages. Even the infrastructure program (“Build, Build, Build”) may not proceed as scheduled, not necessarily from lack of funding but from restart delays due to lingering fears and social distancing needs.
Is there an opposite of the wealth effect, both psychological and real? Is the impact of the lost value of assets and the growing unpredictability of future earnings and job security from shaky businesses going to lead to a “poverty effect”?
What are the behavioral patterns of this post-quarantine economic virus?
Impulse buying will be dormant. Purchase of new sneakers for the workout, another bottle of single malt, and the latest phone model upgrade will be deferred. Why get a new jacket? After all, with the lockdown, the closet seems to be bursting. Only the shorts and the T-shirts for house wear moved. The once tempting sign of “sale” in a retail outlet will not even cause a flutter. Credit card use will be down. You still need to pay the old bill.
High-end purchases like cars, artworks, and property for investments will slow down. While the virus has hit the subsistence level hard, it has not spared even the wealthy, high-net-worth individual. It is this segment that had previously high consumption levels that will be hit by the poverty effect. Even industries like airlines are cancelling orders for planes meant for refleeting. The chain effect of such cancelled consumption due to closures or lower business prospects will result in job losses and lower consumption.
It will be a wait-and-see attitude even for the wealthy (or once wealthy) class. What the stock market analysts call “waiting in the sidelines” can trump “hunting for bargains” in the stock market.
The consoling thing is that the poverty effect is global, as was the quarantine. So the new normal of caution in spending and a reordering of priorities on what to spend on (back to basics) is a new normal. There isn’t much “best practice” to learn from in how to get out of the economic rubble.
Still, the poverty effect is not just psychological. The effect of poverty is only too real for the majority. The psychological and real barrier in spending at this time will adversely affect the level of consumption and reduce GDP growth prospects.
As in all down cycles of the economy, the individual needs to focus not on how much he has lost, but how much he still has left. And at this time, feeling the pinch is not just all in the mind.
Tony Samson is Chairman and CEO, TOUCH xda
