The flood of money pouring into personal bank accounts during the COVID-19 pandemic has been staggering, as lockdowns leave consumers with little choice but to save after slashing their spending on such things as eating out, holidays and commuting to work.
There is a wide range of estimates around of how much money is poised on the sidelines ready to be spent, but the consensus is that it is a record, with the only debate being how and when it will be spent.
We’re on the cusp of finding that out with Sydney exiting lockdown and Melbourne only a few weeks behind, although it would be fair to say that most people will probably take the reopening phase carefully before launching into a full Christmas spending blitz.
Estimates range up to $230 billion and beyond
UBS economists say that households have amassed an extra $120 billion in bank deposits since the pandemic first struck – which works out at an average of $6,000 per adult.
However, that doesn’t include the extra loan repayments that have been made, the credit card balances that have been cleared and the way lower interest rates have caused many home loans to be well ahead of their payment schedules.
Throw in loan refinancing at much lower rates, massive dividend payments by many companies and the amount of available cash standing on the sidelines totally blitzes those controversial but relatively tiny $900 Rudd government stimulus payments made after the Global Financial Crisis.
Taking just some of that into account has led to estimates by other analysts such as Commonwealth Bank economist Gareth Aird that take the amount up to a mammoth $230 billion – a sum that would grow even further to around $300 billion or more if business savings are taken into account
Not everybody is cashed up
Of course, on the other side of the ledger are the many businesses and households that have been pushed to breaking point and beyond by the pandemic and associated lockdowns.
They are unlikely to be taking part in a wave of spending, with the more likely result being a period of consolidation and recovery that could be protracted.
The really tough question is how much of this cash will be pushed into the economy or otherwise invested and how quickly?
Judging by the end of last winter’s lockdown, the spending could be fast and furious, which makes sense when you consider the many purchases that have been put off until they are able to be made when shops reopen.
The massive logjam with Australia Post and significant supply chain disruptions for other items including new cars and limited overseas and domestic flights means that not all of the pent-up demand will be able to be met.
Inflation will greet the wall of savings
The other great uncertainty that awaits the wall of cash is the effect of inflation on input costs for a wide range of items.
Prices for many investment classes have not been standing still during the pandemic with property and shares being just two notable examples.
Higher oil prices and ballooning shipping costs are likely to feed into higher prices for a wide range of goods and lower production due to the pandemic will also feed through to scarcity and higher prices.
The ongoing energy shortage in China will also be a continuing drag on production, adding to difficulties in global supply chains.
Response to stimulus important too
Responses to stimulus at personal and household levels will be important too.
It is possible that many individuals will continue to hoard cash, particularly given that 2021 was meant to be a post-pandemic year but turned out to be anything but.
Overcoming natural and understandable caution is part and parcel of what stimulus payments are meant to do.
However, when you think about the mountain of government spending (and debt) used to safeguard pay packets, the volume of Reserve Bank bond purchases amounting to billions of dollars a week – that sort of money creation is almost certain to lead to increased spending and economic activity – and also inflation.
Households that have reduced their debt levels will feel more able to spend on an overseas holiday even if travel costs have risen and sheer frustration and boredom from lockdowns will surely see restaurants, cafes and pubs fill up again as soon as they are allowed to.
Similarly, businesses that have been piling up cash will be more likely to expand and buy struggling organisations once the future economic path becomes a bit clearer.
In many ways this pandemic will change the way Australians spend and react to changing circumstances for many years to come, but one way or another, that wall of stimulus money will lead to greater spending and investment.