COVID-19: Why spending is essential to help return the UAE economy to pre-pandemic scale

Dubai: From the perspective of any economy striving to rebound post COVID-induced lockdowns, now may not be the best time to massively cut back spending as this only further drags out a return back to pre-pandemic scale, when it comes to how your money was being spent before the outbreak.

Most economies worldwide are facing contraction, and are facing delays in rebounding to a position of growth, mostly as the virus contagion – that still continues to spread rampantly – dampens consumer sentiment to shop and spend like before the pandemic struck.

Moreover, as the economic pressures prompt unprecedented job losses and increased job uncertainty, restrictions on movement to curb the spread of the virus, has forced one to look for ways to rein in spending and save like never before.

How does spending affect economy?

But consumer spending made up nearly 40 per cent of the country’s GDP in 2019, if residents aren’t spending, then understandably that will have a significant impact on the economic activity and GDP will fall, one which experts often remind can create a vicious cycle.

When individuals decide not to spend, but rather to save for a better price the next day, or they are keeping money and not spending it because they think that they should have precautionary savings, delves into an economic theory – popularised by British economist John Maynard Keynes in the 1930s – on how a lack of consumption could make only things worse for economies.

And as expected, with so much economic uncertainty surrounding the coronavirus outbreak, people held onto their money in March and April, and consumer spending dipped to a record lows worldwide, the household savings rate hitting its highest in decades, and growth took a hit as well.

Rebound in spending helps growth

However, the buying behaviour and outlook is seen changing for the better now in the UAE as data indicates a contrarian trend, and this may not be necessarily bad news, for both spenders and savers alike.

Consumer spending rose 63 per cent in August, compared with March, as the UAE government eased coronavirus-related restrictions to allow businesses and other economic activities to resume. Spending in restaurants was 75 per cent higher in August than in March, and consumer spending on apparel grew 78 per cent in the same period.

Statistics has shown historically that consumer spending in the UAE averaged Dh482.6 billion from 2001 until 2019. With spending in the UAE expected to reach Dh549 billion by the end of 2020 and estimated to exceed Dh950 billion in 2021, experts view that the economy is well on track to stage a recovery by next year and the sluggishness and dragged out recovery will remain partly dependent on how residents and business owners implement their money spending and saving strategies.

Also, consumer expenditure per household in the UAE was at Dh63,000 in 2019, a growth of 14.1 per cent compared to Dh55,200 in 2018, according to official data from the Federal Competitiveness and Statistics Authority. 

How does saving play a role in economic recovery?

When it comes to savings, studies have shown how in the two decades between 2000 and 2020, the overall rate of savings in most parts of the world have more or less trended downwards, with the rate hitting all-time lows during this time period.

While reining back spending, cutting back on expenditure and holding onto cash is the go-to solution during such dire times and circumstances, it may not be helping when it comes to aiding hopes of a return to normalcy for all. So, what can a saver or a person looking to closely budget do in a situation like this?

Higher savings mean that consumers have cushions that can help absorb overwhelming expenses without digging the hole deeper. But just as importantly, having a higher portion of income allocated to savings means that living expenses are lower – and consumers can adjust their budgets to spend a larger chunk of income on increased mortgage payments or better compensate if they lose their jobs.

Consumers’ role in the economy’s rebound

That ability to cope with financial hardship ultimately means that the economy recovers much faster. After all, when the bills are being paid, the banks, utilities, and grocery stores can keep their doors open – and their workers employed.

That's not to say that savings are without risk; anyone who held stocks in their retirement accounts at the outset of the Great Recession–in October 2008–can attest to that. While it is still essential to save money any time – even more so in a crisis such as this – instead of hoarding up all your money in a savings account that would give hardly any returns, putting a portion of that money to use is still considered safe by market veterans and even more effective use of them.

Bottom line?

On both a personal and an economic level, economists add that maintaining a good saving and spending rate is one of the best cures for economic woes. While it's true that when many live within their means, it means that they'll be less susceptible to economic downturns in the future, but the chances for the economy to rebound quickly improves when spending isn't reined in too steeply.

While it varies with people, contrary to popular belief of how holding onto just cash can help you ride out the tough times, spending a portion in a way that gives you meaningful returns – be it in the form of safe investments or spending it on anything whose value appreciates and not depreciates over time – will bode well with your finances and help prop up the economy’s return to pre-pandemic levels as well.