This recession was different

How did this pandemic-led economic recession differ from those we have experienced in the past?

A new analysis from the Institute for Fiscal Studies (IFS) compared trends in output, consumer spending and saving levels during the 2020 recession versus those in the two previous recessions in 1990 and 2008.

They also drew upon individual-level data collected during the Covid-19 pandemic.

Key findings include that savings built-up during the pandemic were more likely to be drawn down slowly.

The household saving rate stayed high even in the second quarter of this year, at 18%.

The IFS found that increases in net wealth over the pandemic were more common among higher-income families, who were less likely to experience economic uncertainty and income losses.

Higher-income households were also less likely to change their spending behaviour as the economy recovered.

During this latest recession, falls in consumer spending were mainly due to fewer purchases of services rather than durable goods.

Purchases of services fell by 30% relative to their pre-recession levels. However, during the 2008 global financial crisis, purchases of services declined by just 4% at the equivalence point.

This change in spending habits could be because it was easier to postpone the purchase of durables, and therefore the data is less likely to be smoothed over time.

The IFS measured attitudes towards savings and spending by offering respondents a hypothetical £500 payment, asking them how they would respond to this payment.

  • On average, respondents would spend 11% of the value of these payments over the next three months in March 2021.
  • More affluent households were more likely than poorer families to report using the money to add to their savings.
  • Poorer households were more likely than wealthier households to say they would use the payments to reduce their debts.

The IFS concluded that consumption growth in the next few months is still likely to be rapid, and this could be accompanied by additional price inflation.

With consumer demand and household saving returning to pre-pandemic levels and firms adjusting to new spending patterns, more inflation feels inevitable.

However, the fact that additional household savings accumulated during the pandemic are likely to be spent slowly should limit the extent to which consumer spending will drive economic recovery and price inflation.