Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
How have your spending habits changed in the past 15 months of lockdown?
The chances are that you saw your outgoings drop significantly in those first few months of the pandemic when lockdown restrictions were at their toughest. If you were lucky enough to avoid a blow to your income this may have led to a rise in the amounts you were able to save. Then, as things opened up and we adapted to new ways of buying online, your spending is likely to have crept up again.
This is the anecdotal experience of many of us over the past year or so, and now it’s being confirmed by official analysis of the economy during the pandemic. Last week the Bank of England published a report on household debt during the crisis which showed how this pattern - of restricted saving at first, excess saving and then a gradual return to more normal levels - played out in millions of households across the country.
The Bank’s analysis contained some good news about the state of household finances and the economy, but also some reasons to be cautious as we enter the post-pandemic period. Its headline conclusion was that the UK appears to be in a much stronger position to recover from the financial blow of Covid-19 than it was from the credit crunch and financial crisis in 2008.
Post-2008, the experience around the world was that those countries with the highest levels of household debt suffered the slowest recoveries because indebted people tended to cut back on their spending the most, either because they had lost their income or feared that they would.
This time round, UK households entered the pandemic with a lower level of debt - 123% of household income in 2019 versus 145% in 2008 - but also benefitted by having their incomes protected by the schemes introduced by the government.
In total some 14.3million jobs have been supported through the furlough and self-employment support schemes. That has meant that, despite the record 13.5% fall in GDP recorded in the second quarter of 2020, the fall in gross household disposable income was limited to just 3%.
Underneath that figure, however, there are big differences in the experiences of households up and down the income ladder. Both rich and poor alike have seen average incomes fall in the past year but the recovery for earnings among the top 20% of earners has been faster than for other groups, the Bank confirmed. At the same time, the richer you were when the pandemic struck the more you saw your spending fall and the more you have been able to save as a result. That’s because the spending that was most restricted was discretionary while spending on everyday essentials, which accounts for a higher proportion of lower-income household spending, continued even in lockdown.
The overall picture, then, is of an unequal recovery from the pandemic, with lower-income households relatively worse off than richer ones, but with households everywhere enjoying a much greater level of protection than was the case in the last recovery from an economic shock.
So why the need for caution about the economy from here? Well, to use a health analogy, the patient may be out of intensive care - they may even be sitting up and talking - but they continue to be supported by plenty of medical care that will have to be removed at some stage. It isn’t yet clear how many of the jobs being supported by the furlough scheme will be threatened when the scheme is scaled back from next month.
Meanwhile, the strong recovery in GDP and economic activity we have seen in the past year is likely to have been helped by those households who were able to save at the start of the pandemic spending more of that money as restrictions have been lifted. It follows that this support in spending is likely to be time-limited and may recede as the months pass.
From the point of view of the stock market, enforced saving from lockdown, which has been repeated across major economies, has been supportive of share prices because middle and higher earning households have been able to save more. A key question now is whether that savings habit sticks as our opportunities to spend increase.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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