Was Frankie goes to Hollywood right?

Posted by: Paul Donovan

17 Apr 2020

Daily update

  • Economists of a certain age are familiar with the lyrics of the band Frankie goes to Hollywood: "When two tribes go to war, money's all that you can store". This is also true in an economic lockdown.
  • There are three baskets of consumer spending in a lockdown. Some spending is stable or increases. Some spending is delayed (people will buy, once shops reopen). Some spending is lost in a lockdown. In Europe, about a quarter of consumer spending is "lost". If you cannot get your hair cut in a lockdown, you do not get three haircuts the week the hair salon reopens.
  • This means lockdowns can force some people to "store" (save) money. A person working from home with unchanged income can save. A person on a European furlough (receiving most of their income) can save. A person who is unemployed or on a US furlough does not have the income to save.
  • If consumers have had little drop in income, and have not increased spending on things like Netflix and food at home too much, they will have "forced" savings. If consumers are secure in their jobs this money should be spent post-lockdown. This will give an additional (short-lived) boost to economic activity as lockdowns end.

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