Brian Keegan: Reviving demand will be the real key to our economic recovery

Brian Keegan: Reviving demand will be the real key to our economic recovery
Regenerating consumer demand and confidence will be key to economic recovery

The economist John Maynard Keynes spoke about “animal spirits” back in the 1930s – the invisible guiding hand that determined the ups and downs of the stock market, changes which often bore little resemblance to economic reality or the prosperity of the company whose shares were quoted on the market.

More recently, behavioural economics economists have pinpointed reasons why people don’t behave entirely rationally much of the time when making commercial decisions. 

Such decisions are often taken by reference not to the most correct information, but rather to the most recently available information.

People are also disproportionately risk averse, and will take options to secure what they have in preference to riskier options even though these could generate significant gains.

These decision-making processes affect many sectors struggling to recover from the impact of the pandemic and can even negate the benefit of government supports. 

One such example is the hospitality sector.

Hotels, bars, guesthouses and restaurants could not benefit to the fullest extent from the most effective government support, the wage subsidy scheme. 

The wage subsidy scheme takes as its reference point from the employment levels at the end of February. 

February is always a low point in this very seasonal sector, and the subsidy scheme isn’t helping when hospitality businesses need to take on more staff over the summer months.

Consumer sentiment is tricky to gauge, but from speaking to businesses which are reopening and to their advisers, a few trends seem to be emerging. 

One of these is that, despite headlines about large parties and a lack of adherence to social distancing in leisure settings, many people remain quite fearful of infection. 

True, there has been a surge in pent-up demand following the complete lockdown experienced in April and May, but this is not necessarily being sustained.

Secondly, people’s behaviour is greatly affected by their own direct experiences of the virus. 

As the behavioural theories suggest, people who have had a direct experience of the impact of coronavirus in their own families or businesses will be considerably less willing to go out and about than people who haven’t shared that experience. 

As a nation with a huge diaspora, we also are acutely aware of the situation of friends and relatives beyond this island, in the UK and in the US in particular.

Unfortunately, many retail and service businesses have already folded or will not be reopening. Government subsidies and supports were particularly needed at the time of the initial lockdown and these remain essential.

However, it’s one thing to support business models but there’s a real possibility that demand, particularly from consumers, will not be quite as resilient as before. 

Gaps on the high streets and in the shopping centres - created by shuttered businesses - will reinforce to consumers the impact of the pandemic, and that, in turn, will dissuade shoppers.

The Government’s July stimulus is crucial to restoring full economic activity - particularly in the consumer sector. Rebuilding confidence is going to take quite a while longer. 

Supporting the liquidity and cashflow needs of manufacturers, service providers and traders won’t be enough if demand isn’t there.

We had to stifle supply of goods and services to cope with the pandemic. 

Economic recovery is now dependent on the other side of the coin; we have to regenerate demand. 

Ways have to be found to re-kindle Keynes’ “animal spirits”.

This will involve ensuring that consumers are confident to re-engage with retail and services, which will be as much about confidence in health security as it is about financial security.

 - Dr Brian Keegan is director of public policy at Chartered Accountants Ireland

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