Free DP Download 28 July 2020 - The Distributional Impact of the Covid-19 Pandemic

Tuesday, July 28, 2020

Sinem Hacioglu, Diego R Känzig, Paolo Surico   
CEPR DP No. 15101 | July 2020

The highest earners in the United Kingdom account for almost half of the pandemic-related decline in consumption, with expenditure for this group falling much more than income. In contrast, the lowest earners have seen the smallest spending cuts and the largest earnings drop, but their total incomes have fallen by much less because of the increase in government benefits. The decline in consumers' spending preceded the introduction of the lockdown, whose partial lifting has triggered a stronger recovery in sectors with a lower contract rate. The largest spending contractions are concentrated in the most affluent regions.

These are the central conclusions of a new CEPR study by Paolo Surico and colleagues, which tracks the economy in real-time by analysing detailed high-frequency transaction data on spending, earnings and income from a large Fintech company in the United Kingdom. Among the findings: 

  • The most affluent households have cut their spending the most during the second quarter of 2020, with the top quartile accounting for about 45% of the decline in aggregate consumption. This represents a 10% increase relative to the contribution of this group to total household expenditure during normal times.
  • In contrast, Fintech App users with less than £20,000 annual income in 2019 have contracted their expenditure the least, possibly reflecting a larger spending on essential goods and services.
  • Low-income users have, however, experienced the largest drop in earnings, around 15%, but their incomes have declined by much less.
  • An increase in government benefits since the start of the pandemic likely accounts for the significantly smaller fall in income (relative to earnings) for this group and, therefore, may also explain part of the less pronounced decline in their spending relative to the other groups.
  • Users at the top of the income distribution may have seen a disproportionally larger increase in their personal savings.
  • A significant part of the spending drop actually occurred before the introduction of lockdown measures and social distancing policies in the second half of March, suggesting that fears and uncertainty about contracting the virus and/or about future income have likely contributed to shape the dynamics of household expenditure.
  • The spending increase in June, after the partial lifting of some of the restrictive measures, has been more pronounced in sectors characterised by a lower contact rate such as retail, food delivery and durable goods.
  • Spending on categories such as restaurants, travel & holidays and recreation outside home is still significantly below pre-pandemic levels.
  • London and the South East exhibit the largest contractions in the second quarter of 2020 whereas Northern Ireland and Wales have experienced a much milder spending reduction.
  • There is little evidence of any systematic relationship between local spending changes and either the share of Covid-19 causalities or the share of furloughed workers across regions.

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