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As the coronavirus disease 2019 (COVID-19) virus restrictions
are phased out, pent-up demand and a surge in household savings
will support the post-pandemic consumer revival.
The sectors with the biggest scope for a rebound after the
pandemic are not necessarily those with the steepest declines in
2020. Some of the lost consumption will not be regained, especially
as a share of consumers lose their jobs and businesses face
bankruptcy.
IHS Markit research indicates that the pandemic triggered a
marked increase in inequality, with implications for consumption at
both ends of the income spectrum.
Although many CEE consumers have struggled amid COVID-19, 2020
demand growth varied dramatically by country and sector.
Consumption of food, housing and utilities, and healthcare
generally increased, while purchases of many other product
categories declined, particularly those that were hit hardest by
social distancing measures, such as tourism, entertainment, and
transport. Across countries, the differences in household demand
growth were influenced by the structure of consumption (reliance on
sectors affected by COVID-19 restrictions), change in unemployment
rates, and wage growth. Household credit growth was also important,
playing an especially significant role in driving consumption in
Turkey. Throughout the region, the rising importance of e-commerce
helped prevent a steeper drop in household demand, although data
from Poland indicate that consumers are returning to shops whenever
restrictions ease, with positive implications for traditional
retail.
On the labor front, unemployment rates rose far less rapidly
than expected last year, thanks to fiscal measures aimed at
supporting employment. Lithuania and Estonia have recorded the
biggest upswing in unemployment rates since February 2020, while
Poland's jobless rate increased only slightly. Despite some
volatility, average monthly wages rose across the region in 2020,
with especially rapid growth in Lithuania, Hungary, and
Bulgaria.
Data by sector across eight CEE countries indicate that
healthcare and ICT recorded the fastest wage growth, which is
unsurprising given the increased demand for ICT services and
bonuses for medical workers. In contrast, hotel and restaurant
wages recorded the steepest drop overall. On average, ICT and
finance wages are the highest in the CEE region, while hotel and
restaurant wages are the lowest. Employment data signal that the
number of jobs in the hotel and restaurant sector fell in all eight
countries, but other sectors showed divergent patterns.
Which countries and sectors will experience the fastest
post-COVID-19 recovery?
In its March forecast, IHS Markit is projecting that private
consumption in most CEE countries will surpass 2019 levels by 2022.
As a share of 2019 consumption, Turkey, Bulgaria, and Lithuania are
expected to have the highest 2022 levels, partly thanks to a
comparatively strong 2020 performance. In contrast, the revival of
private consumption will be delayed in Slovenia and Latvia, partly
due to the two countries' steep declines during 2020. Latvia (along
with Croatia and Serbia) also experienced one of the region's
slowest revivals from the 2008-09 global financial crisis
(GFC).
As employment support measures are phased out, jobless rates are
projected to increase in 2021, with negative implications for
household demand. This is particularly true in countries that have
experienced a protracted period of restrictions on economic
activity owing to continued challenges related to COVID-19. Small
businesses and the self-employed could face particularly high
risks. Among CEE countries, Croatia has an especially high share of
employment in vulnerable sectors, while Serbia and Turkey have
large shares of self-employed. Even where jobless rates remain low
in 2021, wage growth is likely to decelerate.
Savings to help fuel consumption during recovery period,
but inequality is rising
While labor market pressures present downside risks,
comparatively low household debt ratios and increased savings will
support the region's consumer recovery in 2021. Social distancing
restrictions and feelings of insecurity among the population
contributed to a rise in household bank deposits during the course
of 2020, further boosted by higher average wages. In most
countries, household deposits significantly exceed the level of
loans. Last year's rise in household savings is especially
important when considering the outlook for investments in housing
and renovations, as well as big-ticket consumer purchases such as
automobiles, furniture, and household electronics and equipment.
Higher bank balances could also help finance more extravagant
vacations once COVID-19 restrictions are phased out.
Although savings data indicate considerable room for a rebound
in spending as consumers release pent-up demand, there is likely a
significant imbalance in deposits according to household income
categories. Indeed, the population with lower incomes and education
levels appears to have been hit harder by wage reductions and job
losses, indicating that their savings were limited last year, a
trend that will continue, or even heighten into 2021. Even as the
economy reopens, lower income households are likely to save more as
a precaution against the risk of additional shutdowns and possible
unemployment.
While it is too early to tell precisely how much income
inequality has increased amid the COVID-19 crisis, our research
indicates a likely amplification of the phenomenon in the coming
quarters, especially given governments' reduced ability to
distribute social transfers once the consolidation of public
finances begins. Individuals working in the most vulnerable
segments share many of the same characteristics (an
over-representation of certain age groups and gender), and
inequality will be further affected in some countries by a marked
drop in activity rates. Lower-paying jobs, more likely to be on
temporary contracts (with skills that are arguably more easily
substitutable than average), are in general more vulnerable to a
deterioration of the economic environment. This is illustrated in
Chart 8, taking the example of the GFC and subsequent sovereign
debt meltdown in Europe, when high income individuals saw their
share of total revenue increase in a good half of CEE countries
(sometimes markedly). In the countries where the share dropped, the
gains of the bottom 20% (displayed in shades of green) did not
increase much. Instead, the middle and upper-middle classes gained
what the richest lost.
The rise of inequality is likely to have meaningful implications
in terms of spending patterns. Indeed, consumers with different
levels of income consume different types of goods and services:
while low-income individuals usually devote more of their budget to
housing and food and utilities, high-income individuals spend more
on items of personal care, food outside, and transportation. IHS
Markit research suggests that the share of food in CEE consumer
expenditures is likely to shrink in the coming years. On the other
hand, consumers are expected to devote more of their budget to
transportation (personal cars and transport services) as economic
development in the region picks up, and as the rise of inequalities
favors the individuals in the upper portion of the income
distribution.
Posted 24 March 2021 by Sharon Fisher, Director, Global Economics, S&P Global Market Intelligence and