The age of the consumer

6 min read 7 Sep 21

The outsized fiscal response to the Covid-19 crisis has arguably left many households in the developed world feeling better about their financial prospects. Moreover, there is good reason to believe that the consumer – the engine of many advanced economies – will remain high on the political agenda as governments look to rebuild their economies.

Why consumers matter more than ever

The experience of the average consumer through the Covid-19 crisis has been rather different to the period that followed the global financial crisis, with austerity characterising fiscal policy after 2009. 

‘There are reasons to believe that even amid a devastating pandemic, many households in advanced economies are still feeling optimistic about their financial prospects.’


This time around, and faced with a very different crisis, government resources have been focused on supporting the solvency and spending power of the average consumer since the onset of the pandemic in a bid to prevent an initial demand-side shock from turning into a self-fulfilling prophesy – of consumers not spending, businesses going bust and cutting staff thus triggering a surge in unemployment (and reduction in employment), ultimately leading to an overall destruction in wealth and welfare.

Underlying all of this has been a political necessity to keep the consumer central to the functioning of the economy. Developed economies are increasingly service-driven, so keeping economies growing requires the engine of economies (the consumer) to be in good financial health and/or feel optimistic about their future financial prospects. 

As private wealth is the sum of real estate values and financial assets, it is easy to understand why central banks around the world have injected unprecedented amounts of liquidity to prop up financial assets, and why governments will want to make sure that the other circa 50% of domestic private capital (housing wealth) don’t lose their value. This helps to explain why a number of the measures announced since the start of the pandemic also have direct and indirect implications for housing markets.

While the outlook for consumer spending remains uncertain going forward, there are several reasons to believe that even amid a devastating pandemic, many households in advanced economies are still feeling optimistic about their finances.

- Unprecedented policy firepower

Turning the fiscal taps on has involved vast sums of money – to the tune of US$12.7 trillion1 – with governments in developed economies having reportedly spent 5% of their combined GDP on stimulus payouts alone. What’s more, the outsized fiscal response to the crisis has been in addition to other policy measures enacted by central banks, including forcing lenders to impose moratoria on mortgage payments.

At the same time, major central banks also resumed their quantitative easing (QE) programmes while keeping interest rates at historical lows, as policymakers pledged to do “whatever it takes” to prop up their economies in the face of widespread disruption. In contrast to the effects of QE, which have artificially depressed the returns on offer in many mature markets, the government resources focused on the consumer have not impacted pricing in the same way but have been supportive to the credit performance of the consumer. 

- Excess household savings

Many households have accumulated higher savings during the pandemic.

In 2020, household savings rates in advanced economies were the highest seen this century, according to OECD data2. Savings rates are typically much lower in any given year, let alone during a recession. Downturns and recessions are times of economic hardship, seeing household incomes typically fall amid job losses and reduced pay. Last year was a different experience altogether, as jobs were saved and incomes actually rose thanks to many of the fiscal support measures that had been put in place. At the same time, national lockdowns have reduced opportunities for discretionary spending – particularly across the hospitality, travel and retail sectors.

Unsurprisingly, excess savings have been higher in Europe where lockdowns have been widely implemented and government spending has been high.

There is good reason to believe that the availability of excess savings may be deployed into the housing market, either as fuel for up-sizing or deleveraging amid changing priorities and circumstances given the rise in the frequency of people working from home and desire for more living space.

- Buoyant housing market dynamics 

Housing markets in major economies are booming, with low interest rates and high household savings driving house prices higher and mortgages rates to record lows – fuelling buyer demand. 

In the first three months of this year, EU house prices rose at the fastest pace in almost 14 years according to Eurostat data, with Denmark, the Netherlands and Germany seeing solid annual price growth. In contrast, property price growth in Spain slowed to 0.9%. House prices in the UK have also risen sharply, recording the fastest pace of growth seen for almost 17 years in June with house prices also close to a record high relative to average incomes– as the targeted macro-prudential policy measures, in the form of stamp duty holidays, drove buyers to take advantage of the temporary tax relief.

Strong housing market dynamics and rising housing prices could have many interconnected effects. Simplistically put, when house prices go up, homeowners could become better off and feel more confident about their future financial prospects, their ability to repay their debts improves and their propensity to spend more increases.

Sustained credit performance of the consumer?

Taken together, we believe the average consumer in Europe is generally in good financial health. Of course, there is some uncertainty about how the withdrawal of temporary state-support measures, including wage guarantees that have helped to cushion falls in household income and furlough schemes, will impact unemployment levels ahead.

Nevertheless, consumer debt including residential mortgages and consumer loans has exhibited relatively low default and loss rates historically, even in periods of high unemployment. It’s also worth noting that European regulators have made residential mortgages and other consumer loans progressively safer and stronger over the years by imposing restrictions on bank lenders regarding borrower due diligence and loan suitability, effectively attempting to prevent consumers from borrowing at unsustainable levels. The rigorous lending practices employed by lenders across the Europe go some way to explain the low level of defaults and historical loss experience of the asset class.

Going forward, there is good reason to believe that preserving the solvency and spending power of consumers will remain the key economic priority for governments, which could bode well for investment strategies offering access to prudently-underwritten consumer risk, in our view.

1 UN “Monthly briefing on the world economic situation and prospects – No. 146, 5 February 2021”.
2 Financial Times, “Global savers’ $5.4tn stockpile offers hope for post-Covid spending”, 18 April 2021.
3 Financial Times, “UK house price growth soars as buyers race to beat end of tax holiday”, 29 June 2021.

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