Analysts love to talk about a Santa Claus rally whereby equities do well as the festive season approaches. I’m going to suggest that we could be in for something different: a rise in consumer spending as we approach Christmas and New Year.
Consumer spending is something that economists are usually very good at forecasting. It can be reliably related to factors like income, wealth and so forth. But recently it’s been much more difficult to predict – and that’s down to covid. Governments in the developed world handed out loads of financial support but lockdown prevented consumers from spending. This led to an accumulation of savings and reduced debt that I call ‘covid piggy banks’. And the numbers are big. In the US consumers have been drawing on their covid piggy banks all year, increasing their spending despite a fall in real income. If they had cut back in line with the squeeze on their incomes, consumer spending would have been over 6% lower and we’d have a had big recession.
It’s been a different story in Europe where the war in Ukraine has hit confidence hard both via soaring gas prices and by more general fears around economic and military uncertainty. Consumers in Europe have stopped building up their covid piggy banks but have yet to draw them down, in contrast to their US counterparts.
But with year-end festivities having been disrupted by covid in the last two years I reckon we could see stronger spending this year in the Europe and the UK as well as the US in the final three months of the year. And that’s despite colder temperatures in Europe that will make those higher energy prices bite hard. For some people, especially those on lower income incomes and with pay as you go electricity and gas meters it will be a different story but in aggregate, I’m expecting stronger spending.
Stronger spending means the labour market would remain tight and profit margins stay high. But none of this will change the longer-term outlook when those bills become due. And with inflation also eroding existing cash balances the January ‘spending’ hangover could be worse than normal.
