In praise of frugality

The news is awash with speculation about what will be the โ€œnewโ€ normal.  Topics ranging from health to schools to the economy have not been spared.  Understandable as itโ€™s human nature to want security. Economists are feverishly discussing a variety of potential outcomes using letters as analogies: the letter du jour is K. Whilst prognosticating about the post COVID-19 world is useful, it does not address our current environment which is likely to prevail for the next 18 months.

We are currently in a state of frugality which is typical for a recessionary environment. As a finance professional, being frugal is second nature to me! Historical data also shows the mindset of frugality cuts across all socioeconomic strata.  Personally, I would prefer that we have frugality replace our obsession with busyness. Frugality is more productive and more enjoyable than efforts to be busy. Please note that this does not mean being frugal in generosity towards others especially during these difficult times.

McKinsey recently published a snapshot of Australian consumer spending. it is a critical The report notes that despite the temporary rise in consumption during May and June, there is an underlying pessimism in the domestic economy.

The full impact of the COVID-19 will become evident towards the end of 2020 when the bulk of government support is reduced or expires.  Approximately 40% of direct cash support will be removed in 4Q20. As was discovered in the recession of the 90s, Australian consumer sentiment tends to harden. Consumption pulls back disproportionately to the drop in household income.  This trend has been mimicked in the COVID-19 pandemic placing deflationary pressure on the economy.  This is critical given household consumption accounts of 55% of GDP.

As per the McKinsey report, consumer facing companies need to prepare for the rise in frugality.  This shift towards frugal behaviour is represented by a strong focus on price and value. Consumption patterns indicate a focus on promotions, discounts and product substitution.  Moreover, consumers have reduced impulsive buying behaviour and are more methodical, loyal to familiar brands and local products.

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