Consumer sentiment and behaviour will play a critical role in any economic recovery from the COVID-19 pandemic. Federal and State government policy settings must walk a fine line between managing the incidence of new infections and avoiding irreparable damage to the economy.
However, with persistent uncertainty and a long road ahead, the consumer sentiment and behaviour we see today may not necessarily reflect what it looks like tomorrow. Consumers hold the key to the economic recovery, but which door they choose to open remains to be seen.
Consumers currently are erring on the side of caution, prioritising health over finances. Our latest data suggests that 80 per cent of Australians are more concerned about social restrictions being lifted too fast, leading to severe health consequences, than they are about social restrictions being lifted too slowly, leading to severe economic damage. As time goes by the mood may shift.
We have also found that currently one in five are prepared to accept an infection rate in the population of 30 per cent in order to avoid a recession – I’ll spare you how that translates into likely mortality burden but it’s a lot of people. We will continue to track how attitudes shift in the coming weeks as frustrations grow and patience wanes across different segments of Australian society.
For many Australians, but of course not all, the hip-pocket nerve has yet to be fully pinched. With a mix of lucky-country optimism, a sense of geographical insulation and confidence in government actions to date, there is some degree of decoupling between current household sentiment and broader world economics. We see many signs that Wall St is running somewhat independently of Main St sentiment for the moment.
A tangible hit to personal income will shift our relatively optimistic local outlook. Government stimulus and support packages inevitably will come to an end, and if we are hit with a second wave of COVID-19 infections requiring another six-week shutdown, reality and fear will be felt closer to home.
More than one dimension to the impact
It is important to remember to remember that there is more than one dimension to the impact on consumers. Some of us are lucky enough to keep on trucking, but many of us have had our incomes decimated. While the burden is often disproportionately carried by lower wage earners, significant numbers of high earners throughout society have also been hit, due to the industry they work in or the nature of the business they run. An extended economic downturn will see this impact spread to more sectors, including the bellwether of our national prosperity: property values.
It is also important to remember that it takes a while for new habits to form. Humans have an impressive capacity to forget lessons learned, especially around experiences they didn’t enjoy. Of course, there will also be some things that have changed that we won’t want to lose – often our strongest drive is to hold on to what we have now.
A clear potential behavioural shift is in terms of risk aversion. Logically, recent events should provide a reminder for us all, regardless of how vulnerable or resilient, that bad and unexpected things do indeed happen, and it pays to save for a rainy day. The most recent figures do suggest an increase in insurance inflows this year from record low levels the previous year, but this may over-represent those that can afford it. A recent consumer survey suggests that many mass market consumers consider insurance one of the first expenses they’d cut if times got hard.
Furthermore there is evidence that some consumers rushing to buy insurance now may be at under some misconceptions about what their insurance will in fact cover. Reports of insurance policies failing to pay full COVID-related claims and increasing premiums are only likely to increase, given the pressure the industry is under. The more this narrative takes hold, the more trust will be eroded in the promise of the protection insurance provides.
Finally, we can’t underestimate the human capacity for adaptation. If the threat to personal security is extended eventually we may see increased personal risk becoming hyper-normalised: we recalibrate what we consider to be acceptable risk in our lives.
If uncertainty about the future persists for an extended period of time we may find some need to shift our perspectives to cope. Some of us may focus more on living in the now, to escape the anxiety of an uncertain future. So while increased risk-averseness is likely to drive down discretionary spending, there may be an point in in future when some of us decide to throw caution to the wind and seek some good, old-fashioned short-term gratification to relieve collective stress – as we see happen in times of war.
Threats to security inevitably also trigger a revaluation moment, where many rethink their finances, providers and the deals they have. Early evidence suggests that there’s already been an increase in refinancing and provider switching as consumers search for a better deal. We may see many complacent consumers wake from their slumber to force financial services providers to make their offers more competitive.
An uptick of interest in advice
Current evidence also suggests a greater interest in professional advice. The financial benefits of advice are well known; the COVID-19 pandemic has highlighted some of the non-financial benefits, including more resilient mental health among individuals who have an advice relationship. But an increased demand for advice comes at a period in the industry’s history when supply is declining quickly. CoreData estimates more than 5000 advisers have departed in the past 12 months, as institutional players dismantle their vertically integrated models and others quit the industry altogether. Remaining advisers grapple with new education, professional/ethical standards and with rising compliance costs.
Meanwhile the super fund industry has been hit with a triple-whammy of record levels of government-endorsed early redemptions, a flight to cash investment options, and rising unemployment reducing contribution inflows. All this has dented the fee income used to fund member services. This may mean fees will need to go up, or services will be pared back (possibly jeopardising access to affordable financial counselling and advice).
So while clearly hedging my bet on how consumer behaviour will determine our emergence from recession, and while wanting to avoid a sensationalist doom-and-gloom prognosis, the reality is we are now sitting on a cliff-edge. There are some encouraging signs of recovery, but a further extended period of lockdown following a secondary wave of COVID is likely to not only structurally damage the economy but also drive longer-term shifts in consumer behaviours.
We are also going to see this play out at multiple speeds depending on what you do, where you live and how well or luckily you have managed to navigate this crisis. Developments in the next few weeks will be crucial. And we will keep you posted on what we are seeing at the consumer coal face.