Europe may be about to find out. 128 days with my Mother-in-Law.
As market players cling to the hope that a V-shaped economic recovery is still possible in Europe, to match the central-bank engineered rebounds of benchmark indexes such as Germany’s DAX and the Netherlands’ AEX, the reality on the ground continues to get worse for many families and businesses. On Tuesday, the Bank of Italy published the findings of a survey of Italian households on the impact of the lockdown. As you’d expect, most of the findings were pretty bleak:
- More than half of the respondents said they have suffered a contraction of household income following the measures adopted to contain the epidemic.
- Fifteen percent of households have lost more than half their income.
- Some 40% of families are struggling to keep up with their mortgage payments.
- More than half of the survey’s respondents believe that even when the epidemic is over, they will spend less on travel, holidays, restaurants, cinema and theaters than they did before the crisis.
No V-Shaped Recovery.
For most of these people, there will be no V-shaped recovery. Not only are they spending less money today, they expect to spend less tomorrow. While it’s true that people often say all kinds of stuff in surveys about how they will act in the future and then not stick to it, this particular response chimes with my own experience as well as the accounts I’ve heard from friends and acquaintances in countries as far and wide as Spain (where I live), the UK (where I’m from), Mexico (where my wife is from), France, Argentina and the U.S.
It is also broadly supported by central bank data, which confirms that the Covid-19 outbreak set in motion a synchronized global consumer deleveraging. Even after the lockdowns were lifted, many people are frantically saving for the next rainy day, despite the fact that interest rates have been driven to unprecedented lows.
In the UK, where the Bank of England has slashed the benchmark rate to 0.1%, the lowest on record, there was a £4.6 billion net repayment of consumer debt in May while deposits held by households, non-financial businesses, and financial businesses rose by £52 billion, following large increases in March and April.
For most people who’ve suffered a big hit to their income during the crisis, saving is not an option. In the UK, over a third of adults have had to eat into their savings to support themselves during the lockdown. They’re also cutting back on their expenses.
I can empathize. As a freelance worker in Barcelona, I’ve lost three of my main clients (out of six) since March, wiping out 30% of my income. My wife is one of the 1.7 million furloughed workers in Spain that are receiving 70% of their pre-crisis income from the government while wondering whether they will have a job to go back to when the furlough program ends, which is scheduled to occur in September. At that point many businesses will have to lay off some or all of their workers. That’s when the real pain will begin…
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Nick Corbishley 