Second English lockdown led to much smaller reduction in spending than the first, though London lags behind

17 December 2020

These are amongst the findings of new research, funded by the Standard Life Foundation and Trust for London, using real-time bank account data from budgeting app Money Dashboard and phone location data from Google up to the end of November. This research comes as more parts of the country enter Tier 3.

The extent of the recovery in spending since the beginning of the crisis has varied significantly across the country:

  • Overall, spending in November was about 3% below its pre-crisis level. But that’s a combination of a full recovery in spending in Scotland and Wales and a considerably weaker one in England – especially in the South.
  • The decline in the South was driven by Londoners, whose spending in November was still over 10% below its pre-crisis level, thanks in part to large falls in spending in restaurants, pubs and other recreation. The picture is even starker when we compare footfall in London (rather than spending by Londoners), picking up changes in tourism and commuting. Even before the second English lockdown, inner London footfall in retail & recreation venues was more than 40% below pre-crisis – compared with 10–20% in outer London and the rest of the South.
  • Falls in household spending have been greater in better-off areas of the country. This reflects reduced spending on activities such as eating out which account for more of the budgets of higher earners. In January household spending in the highest-paid third of areas (such as Milton Keynes and Cambridge) was 26% above that in the lowest-paid third (such as Bradford and Plymouth), while in November that gap had dropped to 14%. However, these trends may reverse as richer households come to spend down their savings from the crisis.

We can also compare how spending changed in areas facing different public health restrictions. Restrictions not only reduce spending on directly impacted sectors but also change other spending patterns:

  • Shutting hospitality has little overall impact on total spending, largely because consumers tend to substitute towards additional spending on online retail. But the additional online spending will not primarily benefit local economies. This is particularly relevant as most of England is now in Tier 3.
  • Closing non-essential retail (as well as hospitality) in an area does have more significant impacts on total spending, reducing it by around 5%. A large increase in spending on online retailers and a small increase in grocery shopping are not enough to offset falls in spending on clothing, transport and cash withdrawals. Again the impact on spending in the local economy is somewhat more negative because the online spending largely represents money leaving the local economy.

Alex Davenport, a Research Economist at IFS and an author of the report, said:

‘The second English lockdown was somewhat less restrictive than the first. But the difference in the effects on spending is enormous – while the first led to a huge decline in expenditure, the effect of the second was far more modest. Both businesses and consumers seem to have adapted to such restrictions, lessening their impact somewhat. But because consumers switch a lot of their spending to online retailers – who may have little presence in the local area – the effects on local economies and high streets from these sorts of restrictions are still significant.’

Tom Waters, a Senior Research Economist at IFS and an author of the report, said:

‘Generally, richer areas – such as London – have seen bigger falls in spending and a slower recovery, lessening geographic inequality in expenditure. But this is only the first chapter of the story: the reduced spending among higher-income households has led to greater saving. When the economy opens up and these savings are spent down, we may see these patterns reverse.’

Mubin Haq, Chief Executive of Standard Life Foundation, funders of the report, said:

‘Consumer spending is surprisingly high despite further lockdowns and restrictions. But this masks the big shift to online spending, which is devastating high streets especially in areas highly dependent on commuters. More specific and targeted support is needed to help them adapt and recover.’