Unlocking pandemic-induced savings crucial to economic recovery
The publication of the UK’s latest GDP figures further illustrates the scale of damage the pandemic has inflicted on the economy. Although output rebounded sharply over the summer, it is now contracting once again. A weak economy is a concern for many – but will also go unnoticed by many.
The disparities between those who have seen mild disruption to their income and those that have struggled to maintain their livelihoods during this crisis are stark. A key indicator highlighting the difference between these groups’ experience of the pandemic is the amount of savings each has accumulated.
Some savers are more equal than others
Since the onset of the pandemic, UK households have saved £120bn in just nine months, higher than the total amount they saved in the previous two years. While this is an enormous figure, it would be naïve to assume opportunities to save have been equally available to the entire population.
For example, workers in sectors that have effectively adapted to Covid prevention measures have largely seen their income unaffected. This group tend to be mid-to-high earners who had elevated levels of discretionary spending before the pandemic. A large proportion of them have diverted money they would have otherwise spent on recreational activities to savings.
In contrast, staff at consumer-facing businesses have been more prone to redundancy and wage reductions, meaning many of them have missed out on building a nest egg. These people had little room to make discretionary purchases before Covid as they tend to be low earners allocating most of their income to covering basic living costs, meaning restrictions on leisure activities has had minimal impact on their spending.
Entry level service sector and consumer-facing jobs provide a crucial source of income for people with low levels of experience in the labour market and are struggling to compete with more skilled workers – the exact group who have had saving opportunities restricted due to the economic impact of the pandemic.
While wages are relatively low in these jobs, high staff turnover means individuals can typically secure work reasonably quickly, offering them numerous paths to build up work experience. Unfortunately, it is precisely these jobs that have been the most at risk of redundancy during the pandemic.
This has all led, in part, to a severe divergence in savings ratios, largely dependent on whether a sector has successfully adapted to Covid prevention measures.
Some would note that wealth inequalities existed even before the pandemic. This may be true. But what is even more alarming is that Covid has taken away many low-income workers’ opportunity to save by wiping out their main source of income altogether.
Spending to stimulate both sides
The savings of the unaffected many is a hidden source of untapped stimulus that could boost the UK’s economic recovery.
A return to ‘normality’ may be accompanied by a burst of spending by consumers deploying their pandemic-induced savings. If these people do splurge, business confidence is likely to improve, which could jolt firms into lifting hiring restrictions, stimulating job creation in the process.
An uptick in spending would therefore benefit those who have been able to save and those who have not. Consumers who have built up additional wealth reserves could finally release pent-up demand by purchasing goods and services that have largely been unavailable since the onset of Covid. This is likely to result in targeted job creation in sectors that have been acutely impacted by social distancing restrictions, offering a route back into the labour market for people who have borne the sharp end of staff shake-outs.
Unlocking the reserves of those who have been shielded from the worst effects of the pandemic may provide a bigger shot in the arm to the economy than any policy maker or central banker can deliver.