The coronavirus pandemic has had serious repercussions for people’s finances and mental health. Consumers have changed their spending habits, responded differently to financial threats and even lost some income as a result of it.
Countries implementing greater pandemic-related above-the-line fiscal measures such as transfers, wage subsidies, tax deferrals or reductions and debt service suspensions may experience smaller losses overall.
1. Unemployment
The COVID-19 pandemic has led to a global recession with considerable variation across countries and regions, expected to recover gradually but remaining below pre-pandemic projections for some time after recovering fully over time.
As has happened with previous economic downturns, this economic collapse will undoubtedly impact financial behavior in unforeseen ways. For example, during the initial technology boom investors frenziedly purchased electronic stocks; later when those stocks burst they turned more attractive as investments with lower risk profiles like bonds.
Work in America was already precarious prior to the coronavirus pandemic, with many Americans laboring at contract or gig jobs with few benefits or protections, leaving workers more exposed to job loss risks; this led to an increase in unemployment rates which had wide-ranging adverse impacts, including decreased incomes and poverty levels; furthermore job loss has long-term wage impacts such as wage scarring (Farber 1993b, 2003) which can only intensify during times of widespread displacement such as recessions.
2. Real Interest Rates
Real interest rates reflect the true cost of funds to lenders or investors after accounting for inflation, and also reveal market participants’ underlying rate of time preference; for instance, if someone wishes to use funds immediately they display higher time preference and are therefore willing to pay higher real interest rates when borrowing loans.
Real interest rates of high levels reduce the reward of saving, making borrowing more costly, which has an effect on resource allocation between present and future uses.
Rising inflation erodes the real value of money and returns on savings and investments, diminishing their real returns and the natural rate of interest, in turn reflecting that people are less willing to sacrifice consumption of goods and services in order to save for the future. Demographic trends such as longer life expectancies and lower fertility rates further reduce neutral rates.
3. Real Wages
Even amid dire predictions of recession, household purchasing power has improved across the income distribution since the end of pandemic influenza in 2012. Real weekly earnings for those at the bottom quartile have grown by an impressive 3 percent during this time. While wage growth for people who fall between these income levels remains strong.
Aggregate measures of “real wages” have decreased as time goes on. These measurements, created by dividing aggregate prices by an aggregate consumption basket, serve at best as an approximate proxy for household purchasing power and at worst as misleading fictions.
Demographics and regional variations in price trends also skew these aggregate measures of purchasing power, suggesting some high-demand jobs may have kept up with inflation while others have lagged behind. A more accurate measure would track real wages of individual households and account for both hedonic adjustment and lifecycle consumption shifts when computing purchasing power.
4. Savings
Saving is the practice of setting aside money for future consumption, investments or bequests. Saving should not be confused with spending which involves risky investments that often results in immediate consumption of funds. Savings accounts typically provide low interest rates while investments often yield returns that grow wealth for savers.
Saving rates in any country are intimately connected with its economic development, because all things equal, population growth or technical advancement will lead to greater savings rates.
Savings accounts provide an effective and convenient means of saving, without loss and with easy access. Unfortunately, poor people often fail to use these services even where available – they prefer informal methods like rotating savings groups or family savings funds instead. Studies have revealed that seminars promoting savings behavior can significantly increase participation; Jamison, Karlan and Zinman pair training on savings behavior with account access in Ugandan youth clubs for greater results.
