Its been a while. I used to write a quarterly digest of all the economic data for my old companies with implications for clients. I liked doing it and the feedback was always good, providing, as it did, something new to think about and a broader context upon which what we did (media buying). I even presented it to clients and media owners on occasion and again the feedback was always good, with the feedback usually centred around how I made “dull charts of numbers” come to life.
Since I left my last role a year ago i have contemplated doing a digest for this blog. It’s been a fascinating time with regards household finances but I’ve always come back to the fact that all the data i use is in the public domain and “surely” people are looking at this stuff. Also many of the serious news outlets do a digest. However, now I’m not so sure. As such this post is going to be view on what’s happening at the moment based on the most recent available data. Its also been a useful exercise in giving me a quick overview of the market and the current dynamics, any exisitng trends prior to Covid and reviewing LONG data (the important kind).
For those of a TLDR variety the following paragraphs summarise what you see as you make your way through what is a fairly large digest of data, i couldve included even more as there is loads of free stuff out there but lets leave some of those analyses for another day..
So… what we are seeing is a a twin-track recovery. There is a lot of talk about a K-Shaped recovery and while I’m not sure the letter does full justice to the effects we’re seeing i’ll leave it at that. When i say twin-track, what’s really happening is that the rich have got richer and the poor have got poorer (in brutal and simplistic terms) and this isn’t confined to Households either, its at country levels too (and businesses as well).
So you have a Macroeconomic effect being replicated at a Microeconomic level (which doesn’t always happen).
At an aggregate level we see the economy beginning to warm back up with rapid rebounds across the board. At a HH level we’re seeing consumption rise, employment rise, wages rise and confidence rise but; against the spectre of price increases driven by an imbalance in demand vs supply (brexit and covid combined are a powerful force). UK Households have been prudent (on the whole) at paying down debt during the last 18 months whilst rapidly increasing savings but; this is skewed by overall income with the wealthiest HH’s benefiting most.
To use a business analogy, HHs have discovered their real fixed costs but the difference between sustenance levels is less than discretionary and therefore as a % of total income are higher for lower income HH’s. In many cases those affected have seen no material reduction in outgoings either i.e. they had NO discretionary income anyway.
So what does this mean for marketers? Well as a whole, its a bit of an issue seeing budgets reduced so considerably, even if that’s understandable. Businesses have weathered the storm in a similar way to households (twin track) some will need to rebuild balance sheets but others will be in a strong position having reduced capital projects and expenditure significantly. Therein lies the benefit of Marketing and Comms. It can help rebuild/strengthen cash flows into the business and the opportunity is certainly there from a consumer perspective.
I don’t subscribe to a twin track strategy though.
Most businesses have an audience in mind, whether they are catering for higher income families or lower, its rare (grocery being a prime example) to get a mix (in fact most of these “middle” brands are losing their way), therefore focus on this. Single minded, consistent investment over the next 12-18 months will certainly be beneficial. There will obviously be some groups that are “hidden” within income levels (youth, part time workers, the self employed), but ultimately brands are a neat “heuristic” for people to self-identify and exercise choice with i.e. for most people know what you deliver already.
Second guessing a specific group is always a poor choice (as is pretending to understand them), so speak to these key groups and individuals within your focussed audience but also acknowledge that they won’t be the only buyers and look for what unites not differentiates. This isn’t about trying something new yet, that can wait until the balance sheet is healthy, this is about accelerating cashflow in the immediate whilst supporting the long term. Focusing on what the company knows works and hammering that home. There may be some tactical opportunities but at this time its likely that they will generate less money than the cash cows so focus on the big stuff.
The opportunity is now for marketers to demonstrate their commercial nous and position their specialism as a powerful tool in either rebuilding a balance sheet or extending growth. It should be an dynamic time with plentiful opportunity for businesses that are able to respond and react fast enough.
Now into the data and the trends, there is a lot here, all linked back so even if you can’t be bothered at least we i’ve summarised a load of useful links….
The OECDprovide quite a wide spread of options although there has been a clear shift in expectations driven primarily by the vaccine roll-out in richer countries.
It’s also clear that at a country level that the recovery is varied by sector and Govt. policy i.e. stimulus. This “uneveness” or twin-track effect is a concept that we will return to again as it seems to be the core principle to understand behind this economic shock. We also appear to have overcome the worst of our economic uncertainty with the trend falling from its April 2020 highs which is a hopeful return to a more stable period (at least economically).
Some may ask, why look at broad brush stroke global data first, the key is to understand the macro trends and see how/if these follow through. Its appears true that the Macro currently reflects the Micro and what happens on the global stage is a mirror-image of Household economics (conceptually of course). So we have this twin-track recovery. This was/is perhaps to be expected as a simple function of timings and differing policy responses to the Covid emergency whilst at a household level we have the fixed cost of subsistance (with little flex) vs. income calculation.
At a UK level we’ll start with the classic indicator GDP. Now we know that Covid had a massive affect on MoM data so I’ve tweaked the Y axis to make the chart a bit more readable. For readers information the peak and trough for the covid impact were some 16.5% and 19.3% in Q3 and Q2 2020 respectively. I always point out the remarkable stability of the long term trends combined with some striking average MoM growth figures for periods of time.
There are that from post war 1955 to 1979 = 0.7% mom growth. The birth of neo liberalism1980 to 1997 = 0.6%, Labours cool Brittannia 1997 to 2007 = 0.8%, Post crash 2008 to 2019 = 0.3% and then we have Covid..
The Total data set average (mean) is 0.6% inclusive (and exclusive) of Covid. What this clearly shows is that there are some economic “epochs” that fundamentally change the levels. The rest of the time its business as usual, according to epoch. That’s the key with much long data, picking out the signal from the noise.
Looking at which sectors have been driving the recovery we see a suggestion of a new economic “epoch” when it comes to GDP growth at play here. All three major sectors have rebounded but appear to be at a lower “base level” than previously, this could merely be classic the “pent up” rebound but it appears more stable than that currently.
Bearing in mind that the post 2008 average quarterly growth was 0.3.% (or 1.2% per annum vs the previous average of 3.6%) could we be emerging into a sub-1% average annual growth economy? Thats a concern on many levels although its likely that as lockdown is fully removed we’ll get some BIG rapid numbers before we settle down again.
So… Lets dive into a bit more detail with these categories. What is driving this? Construction is up first and whilst you can see the impacts of Covid in 2020, since then its been a mixed bag although Govt. Infrastructure investment appears to have been a major driver, supported by private work as Households have invested in home improvements to enhance their WFH experience. We also have a significant bump in leading indicators like enquiries supported by employment and workloads reported by smaller constructions companies across the country. we know there are issues in the labour market (thanks Brexit) and supply of materials (thanks again brexit) which are exacerbating the other inflationary pressures (the main one being significant demand).
The manufacturing industry also appears to accelerating out of Covid with consumer goods production rapidly improving to support current and expected demand for products. This natural restriction of supply (playing catch up) when combined with other factors could be linked to the rapidly increasing levels of inflation (more on this shortly).
Finally the engine of the UK economy, services. Looking at ONS data its clear that the early 2021 lockdown was weighing down the numbers as the primary headwinds. Whilst providing powerful deflationary factors this period has now passed and we can see the impact with historic levels of growth and significant inflationary pressures due to excess demand and restricted supply (similar to manufacturing). Rapidly increasing prices at a time of economic need (the UK is still some 8% lower than its pre-covid peak) will need expert management by the government, if indeed it continues at this rate or is merely a short term blip as companies get restarted. Currently the BoE believe that Inflation will be short lived as excess capacity is used up.
Retail and e-commerce have been one of the stories of the pandemic. There are many fundamental implications on business and society which cannot be covered here (but will be covered elsewhere in the near future by me and my co-author) but its useful to view Retail on its own due to the importance of the category to the consumer driven UK economy and Households in particular (before we delve into their financial situation). The first chart is a simple plot of 12 month rolling total value in retail (excluding fuel). Its worth noting that late 2019 had seen a clear flattening of the historic trend. This is also reflected in the indices with the rapid ups and downs pivoting around what appears to be a consistent base. We’ll see this trend develop more over the next 12 months.
What’s clear when you plot out the totals split by typologies is the fairly limited level of e-commerce penetration across the whole economy AND the size of food as a sector. Looking at non-store as a % split out on its own you can see the shift. At one point over 40% of non-food was e-commerce led (but that’s still a lot that’s not..), its also worth noting that whilst its unlikely to fall back down to the 20% mark the trend line was increasing its rate of annual growth anyway (even pre-covid).
When reviewing the BoEs predictions its clear that the big worry is rapidly increasing prices. This echoes the signals we’ve seen elsewhere in the various economy driving categories. Excess demand and restricted supply – price pressure. One way to potentially help support supply and meet demand is through increasing capacity rapidly. We saw how quickly the economy readjusted to lockdown, we should see the same ingenuity applied to boom time (it won’t happen but we can dream).
And our wonderful own IPA provide some interesting insights. A significant rebound in expectations but no proportionate shift in budgets, double digit declines in the marketing mix vs expected increases across the board going into 2020. It does feel at this point as though Marketers haven’t done the appropriate job of convincing their CFOs and CEOs of the growth potential of their craft. If the brand and businesses have survived this far then surely the opportunity is present to accelerate a recovery, support cash flow, fulfil demand and take advantage of rapid growth and significant consumer held wealth.
Ah! finally we get to the good bit, UK Households! the people who drive the economy forward! But first a recap. it appears that globally we have an imbalanced recovery as different countries have applied different policy actions and financial support, this will affect international supply chains so get ready for continued disruption. There appears to be a skew in terms of the type of countries who are fairing best with lower income and emerging economies suffering more..
Stepping down into the UK economy we have significant bounce back across all categories as pent up demand filters in. This flood of demand is having a significant impact on price inflation due to the limited supply the market has built up but the spare capacity in the market is predicted to even out towards Q4. Looking at UK retail in particular there does appear to be a step change in e-commerce penetration however we’re still talking around 30% of non-grocery retail and less than 20% of all, its noted that different categories will contribute to this average figure. But; physical shopping isn’t going away.
When it comes to our industry (marketing) it does appear that the market is undercooked. Bearing in mind all that pent-up demand, you would’ve expected a bit more support. That said, some businesses may get a bit excited by their ROI numbers (which would be entirely wrong of course).
So.. .. the other side of the coin.. What’s happening behind our front doors? At first glance it all looks good in terms of trajectory, consumer confidence is “on the rise” but its worth digging into some of the supporting metrics too. What appears to be an issue is not finances (debt, income and disposable income) but rather wellbeing inclusive of job security, childrens education and mental welfare. The ultimate legacy of the pandemic may well be a pervading level of general anxiety.
The following data from the ONS’ wellness survey shows confidence interval spread of “mental health getting worse” (LHS) and Happiness (RHS). Its clear that Covid has had an effect on both and whilst the spread of Mental Health Worsening has reduced we still seem to be experiencing a significant increase whilst happiness, again on the increase to an average of 7.2 (out of 10). The Deloitte tracker provides historical context to non-covid movements i.e. in reality Covid has accelerated an already visible trend.
As mentioned, job security (if not financial security as such) has been a more pressing issue but what’s really interesting is that unemployment wasn’t particularly forced up during covid and the actual numbers made unemployed were relatively low, furlough certainly helped here staving off redundancies. Obviously this is a “cold” way of looking at things as these are households directly affected but its worth understanding the numbers and the likely economic impact as a whole. In addition company incorporations have rocketed with significant growth onto the register and a classic V-shaped recovery in terms of dissolutions (also note the remarkable consistency of the GAP between dissolutions and incorporations over time) suggesting that many took Covid as an opportunity to start something themselves. This coould be another significant shift, a rise in the number of self-employed or small businesses.
In terms of what people have been spending their cash on, its been the basics (unsurprisingly) but with an expected significant shift into the discretionary in the coming months. The time to buy big is also returning which is something brands should already be aware of and way into supporting planning for. Much of the theory of “spending during a downturn” comes in here. By the time a marketing campaign is planning and shot, you’ve missed the consumer period if you haven’t been thinking about it. This has been coming for a while. Marketers should be investing.
This issue is that prices are likely to be elevated for a while with letters flying from Threadneedle street to No 11 starting up again. We also see that wage inflation is significantly higher than price, this is likely to feed through too. However; this is a false view to a degree as It’s argued that this income rise is a function of the reduction in employment affecting lower income HH’s rather than a raft of pay rises all around. This means that its underlying wealth i.e. savings and credit may be more useful in understanding what comes next.
What we have is a evolving picture of rising employment, rising wages (to a degree) and rising expectations. Reviewing underlying household economics by looking at savings and credit will enhance our view before looking at the linked disposable income and assets classes (Houses and cars).
To start with we have a significant (and historic) rise in the Savings ratio to 25% due to covid, which is mirrored by the huge and consistent reduction in the credit flows i.e. consumers are paying down debt. This culminates in the huge rises in disposable income which are reflected across the whole country with 11 out of 12 regions seeing double digit growth in the last two quarters (the region that didn’t was London). HH’s have been paying down debt, saving more and have seen their disposable income increase, all positive news for marketers as we exit the covid era because people want to spend and enjoy themselves again.
In terms of asset classes we have Housing, where the tax holiday, combined with WFH pressure and covid-restrictions have warmed up the market considerably. Always worth noting the remarkable stability in the number of houses solid over time. There are suggestions that the short term boom may be just that with instructions declining again, however as house moves are a consumption engine its clear that this will have an impact when people are able to invest a bit more i.e. home interiors, construction, white goods. Nothing gets the economy going in the UK like a house move
On the motor side of things 2020 was a big shock to the category but the market appears to have rebounded back. The ues market (LHS) is very interesting with 2021 behaving in a very atypical manner, new cars are back to a level again but expect this to drop off slightly again. Again worth reviewing the stability of the movements and levels over time. Human beings are remarkably consistent.
Finally, on the consumption front I suppose its worth mentioning the leisure industry which has been battered by covid and almost shut down. Its clear that HH’s are ready to spend in this area but its highly likely that the return will be staggered based on the type of activity and the confidence of individuals as they return to crowds and travel. A trip to a restaurant is “lower risk” than a flight or Gig and these will all take time to return to full occupancy.
So i said that its a twin track recovery (but its also a twin track economy). Data show that the last 10 years have been particularly bad for income but; in the context of Covid its clear that lower income families have been particularly hit. This is a function of the basic level of subsistence requiring a greater proportion of income for those affected. Lower income families were more likely to have dipped into their savings AND not reduced their outgoings creating a double whammy on wealth. I think this is one to be acknowledged but also one that may not affect as many marketers as is thought, these HH’s are unlikely to have had discretionary income on the whole and whilst that feels very harsh, this is not a blog post about ethics.
Brands have specific audiences and groups of buyers and are positioned as such. Its likely that these brands will have researched their own target during the pandemic and be acutely aware of their circumstances specifically, the real opportunity is that an opening up of the economy returns discretionary spend to the market for all brands (because that’s who light buyers are..)
And that is your lot. Hope you’ve enjoyed a tour through the economic data.. maybe I’ll review these old economic posts next
One thought on “The return of discretionary spend, rebuilding balance sheets and an opportunity to grow. Economics is important – just remember the numbers represent actual people and you’ll be OK.”
Impressive analysis and amazing to see how much free data is available allowing almost any “quant” to draw detailed conclusions.