The pandemic led to an unprecedented consumption shock across countries that upended long-standing consumer habits. But what happens once the pandemic is over? McKinsey investigates.
Consumer spending, a major source of economic activity, collapsed as the first wave of the pandemic swept across countries in early 2020. All of a sudden, consumers were forced to change behavior, companies to transform business models, and governments to adjust regulations. And just as the coronavirus has affected regions and individuals in vastly different ways, the economic impact has also been very uneven. Employees able to work from home have maintained jobs and income, accumulating more savings while forced to cut back on spending from lock downs, travel restrictions, and health fears; others lost jobs and income or closed down businesses and have struggled to pay the bills.
While there is reason to be optimistic for a robust recovery in consumer spending once the COVID-19 virus is controlled due to pent-up demand and a significant accumulation of savings, the pandemic, like other crises, will leave lasting marks. Understanding what that means for consumer behavior and the recovery in consumer spending—a critical factor for the global economic recovery—is the focus of this report.
In our analysis, we examine consumer spending in China, France, Germany, the United Kingdom, and the United States. We divide consumers into nine segments based on age and income to determine the size and shape of the consumer demand recovery. Then, drawing on in-depth analysis of six case studies from sectors that cover almost three quarters of consumer spending and encompass a broad spectrum of consumer life, we determine how the mix of consumer demand is likely to evolve and which pandemic-induced behavioral changes are likely to “stick.”
Unlike previous recessions, this one involves no consumer debt overhang, bursting asset price bubbles, or long-term business cycle fluctuations. The sudden and deep drop in consumer spending across China, the United States, and Western Europe, ranging from 11 to 26 percent in the initial months of the pandemic, resulted mainly from cutbacks to in-person services, especially travel, entertainment, and dining.
These categories have been growing over the long term, and consumer surveys indicate a likely strong demand rebound after the pandemic. The massive ten- to 20-percentage-point spike in the savings rate across the United States and Western Europe (amounting to a doubling of annual savings in the United States in 2020) left many households in a strong position to spend.
That means an effective vaccine rollout to bring the pandemic to an end could restore consumer demand to pre-pandemic levels, fueled by rising consumer confidence, pent-up demand, and accumulated savings. China’s robust consumer spending recovery after gaining control of the COVID-19 virus is another reason for optimism for most countries.
Assuming the pandemic is brought under control, we expect a strong recovery in the United States but an unequal one with variations among income and age segments. While many higher income households emerge largely unscathed financially, low income households have lost jobs or face income uncertainty, particularly from changes in the labor market caused by digitization and automation.
As a result, the polarization of consumption between higher and lower income cohorts may increase. We expect spending by mid- and high-income cohorts to bounce back to pre-COVID-19 levels between 2021 and 2022, while spending by low income cohorts could drop below pre-COVID levels once stimulus measures expire. (For more details, see sidebar “Our macro methodology”). Consumption is expected to shift toward older and richer segments, because of both a growing share of the population over 65 and a slower post-pandemic recovery for low-income cohorts. However, we emphasize, this is highly dependent on how quickly health risks recede with vaccinations and whether governments provide further economic support.
By Jaana Remes, James Manyika, Sven Smit, Sajal Kohli, Victor Fabius, Sundiatu Dixon-Fyle, and Anton Nakaliuzhnyi
Download the full report here.