Consumer demand post COVID-19
Expect a fast and strong rebound in consumer spending, argues Jaana Remes, once the pandemic is over as this recession did not involve consumer debt overhang, bursting asset price bubbles, or long-term business cycle fluctuations. On the contrary, the spike of 10-20 percentage points in household savings, both in the US and Western Europe in 2020, has put consumers in a strong spending position. But the recovery in consumer demand is likely to be uneven, especially in the U.S.:
- In the US spending of middle and high income cohorts will return to pre COVID-19 levels. But spending by lower-income cohorts could drop below pre COVID-19 levels once stimulus measures expire as lower-income households have lost jobs or face income uncertainty.
- In Europe, on the other hand, the recovery will be slower but more balanced than in the US.
What will the consumer demand recovery from COVID-19 be like?
By: Jaana Remes – Brookings
The danger of rising leverage
Borrowing in both advanced and emerging market economies has significantly increased as a result of the policy support provided in response to the COVID-19 shock. The debt-to-GDP ratio also increased as output declined in many countries. As a result, corporate leverage has risen an additional 11 percentage points of GDP through to the third quarter of 2020. Going forward, policymakers are faced with a dilemma:
Easing financial conditions—when investors lower their pricing of credit risk—provide a boost to economic activity in the short term. However, the easing comes with a cost. Further along in the medium term, a heightened risk of a sharp downturn arises, starting at 7-8 quarters out. This tradeoff becomes more accentuated during credit booms. That is, the near-term boost is greater, while the medium-term downside risks are also larger.
Confronting the Hazards of Rising Leverage
By: Adolfo Barajas, Fabio Natalucci – IMF
