SAN FRANCISCO – One of the most striking features of COVID-19 is its uneven effect. Many people remain healthy, while others have become seriously or even fatally ill. The pandemic’s economic impact has been similarly unequal, with some households being spared any financial hardship and others struggling or even wiped out. Those differences matter as we look forward to the post-pandemic economic recovery. Although consumer spending accounts for about two-thirds of economic activity, it is a mosaic, not a monolith.
At the McKinsey Global Institute, we recently analyzed consumer demand and behavior during the pandemic in China, France, Germany, the United Kingdom, and the United States. We placed consumers into age and income cohorts to determine the strength and shape of the spending recovery. We then examined which pandemic-induced behavioral shifts may persist after the crisis ends.
Overall, we found that the exceptional nature of the COVID-19 economic shock provides reasons for optimism that consumer spending will rebound rapidly once the pandemic is over. Unlike many previous recessions, this one involves no consumer debt overhang, collapsing asset-price bubbles, or long-term business-cycle fluctuations. The sudden and deep drop in consumption across China, the US, and Western Europe, ranging from 11-26% in the early months of the pandemic, resulted mainly from cutbacks to in-person services, especially travel, entertainment, and restaurants. These sectors had previously been growing steadily, and consumer surveys indicate a likely strong pickup in demand after the pandemic.
The spike of 10-20 percentage points in the savings rate in the US and Western Europe in 2020 (amounting to a doubling of annual savings in the US) has left many households in a strong position to spend. As soon as China contained the coronavirus, for example, consumers started spending again, returning to pre-pandemic activities like dining out, going to movies and concerts, and flying domestically to visit family and friends.
But our analysis of different age and income segments shows that the recovery is likely to be imbalanced, especially in the US. Whereas many higher-income households will emerge from the crisis largely unscathed financially, lower-income households have lost jobs or face income uncertainty. Moreover, many service-sector jobs have changed as firms have automated their operations and moved online, potentially slowing the employment recovery. Once stimulus measures expire, therefore, consumption could become more polarized between income segments.
Given this, we expect spending by middle- and high-income cohorts in the US to bounce back to pre-pandemic levels in 2021-22, while spending by low-income groups could drop below pre-pandemic levels once stimulus measures end. In Europe, we expect a slower but more balanced recovery, with less pronounced inequality than in the US, although there, too, without additional government stimulus, low-income cohorts will probably recover more slowly than high-income households.
But what consumers spend on matters, too. And the pandemic has interrupted, accelerated, or reversed many long-standing consumer spending habits.
To determine whether these pandemic-induced behavior changes are likely to stick, we examined six consumption shifts across a broad range of sectors that cover almost three-quarters of consumer spending. These shifts include an acceleration of e-grocery shopping, sharply lower spending on live entertainment, “home nesting” (higher spending on items such as home gyms, backyards and gardens, and gaming equipment), a decrease in leisure air travel, a switch to remote learning, and an increase in virtual health-care visits. Two consistent patterns stood out. First, the COVID-19 pandemic accelerated digital adoption, especially in grocery shopping and health care, and we expect this to continue.
Second, the pandemic and associated lockdowns, by encouraging home nesting, reversed the longstanding decline in money and time spent at home. We anticipate that this behavior will persist as well, because some people in high-income households will continue to work more from home after the pandemic, while low-income households will retain low-cost, at-home digital entertainment.
At the same time, many other behaviors that the pandemic interrupted – including leisure air travel and in-person education and dining – will likely resume with the recovery, although potentially in modified form.
While consumer demand is a prerequisite for behavioral changes, the speed and depth at which these changes become embedded within a population depend on the actions of governments and industries. For example, product and service innovations shape consumers’ choices, and government regulations nudge their behavior. What companies and policymakers do will shape post-pandemic consumer behavior at least as much as consumers themselves.
Each major economic crisis in the past left its mark on consumer behavior. The Great Depression created a generation of careful savers. The 1973-74 oil-price shock kick-started a move toward energy efficiency and reduced environmental impact. As the greatest economic disruption of this generation, the COVID-19 pandemic also will have a lasting impact on consumer behavior – but one that may be more varied and divergent than ever before.
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