Does lower consumer spending have any economic benefits?

Published on: 1 September 2022

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven on the positive flip side of massive consumer spending cuts. “The current situation, in which high inflation forces lower spending, has mainly shadow sides. But we cannot deny that there are also some bright spots.”


Particularly - but not only - due to the war in Ukraine, price levels have soared in the space of six months. Energy prices are at the top of the list and are prompting people in the Netherlands to drastically cut back on their spending. Total domestic consumption in June still showed an increase compared to the previous year, but the question is how long this growth will last. Inflation has risen further since then and it seems only a matter of time before consumer spending will decrease. Consumer confidence and willingness to buy fell to record lows in August.


Personnel leaving
For some, the increased price level is an inconvenience, but for others it can be the financial death blow, making a trip to the food bank unavoidable. Bad news for many businesses and consumers. But do consumer savings also offer advantages?  According to Kalshoven, they do, firstly because they prevent the economy from overheating, and secondly because the cause of those savings - mainly increased energy prices - can shift the energy transition into a higher gear. Moreover, high prices can introduce people to options they had never seriously considered before, and lead to more flexibility in dealing with future changes.

Kalshoven: “Macroeconomically, we are getting this inflation because the supply of some key products and services is not matching demand. Demand has recovered after Corona, but there is still a shortage of supply. This is due to the aftermath of lockdowns in China, for example, but also because staff in the hospitality industry or at Schiphol Airport have been leaving. But the most obvious reason is, of course, energy. Shortages - or the risk thereof - have caused prices to explode. If consumers save on energy, this will help to keep prices down. More generally, cutting spending will prevent the economy from overheating - and thus inflation - if there are bottlenecks on the supply side.”


Exorbitant loans
Less frequent visits to restaurants, for instance, may help to alleviate the shortage of hospitality staff - who left the sector in large numbers during the pandemic and did not return afterwards - becomes less acute, says Kalshoven. And there are other examples.

“The risk of a situation arising in which the demand for hospitality personnel far outstrips supply is reduced - and with it the risk of exorbitant wage increases. The same applies to the aviation sector. If people start flying less, the personnel shortage at Schiphol and other airports will also become less of a problem. But the biggest factor is, of course, energy. If people take shorter showers and lower the thermostat, the demand for energy drops. If those who can easily cope with the higher energy tariffs also reduce their consumption, they will help to replenish the gas reserves and keep the prices down. In so doing, they will be showing solidarity with the lower income groups, who simply cannot afford these high prices.”




Lower energy consumption is obviously also better for the climate. High energy prices can also be a catalyst for the transition to sustainable energy. Part of this is really about saving energy, for example by insulating the house or taking a shower for a shorter period of time. 


Kalshoven: “This extremely expensive energy accelerates many people’s ambition to become more sustainable, provided they can afford it and it is possible in their home, for example. Not everyone has the means to invest in a heat pump or solar panels, for example, and for people who rent an old, draughty house from a landlord those options are not available anyway.”

The higher price level and less spending can also contribute to greater sustainability in another respect. 

“The fact that transport has also become more expensive can have a positive effect on the sale of seasonal and regional products, such as fruit and vegetables. A Dutch consumer, for example, may now be more inclined to opt for an apple grown in the Netherlands instead of one from New Zealand. And that in turn has a reducing effect on carbon emissions.”


“Mother of invention”
According to Kalshoven, the increased price level and lower spending pattern can also have a positive effect on your mind set.

“The fact that we are forced to change now makes us more flexible in the future. And necessity is the mother of invention. People who find themselves in deep financial difficulty because of rising prices are more likely to make biased choices. But for others, a need for change can also spur creativity and lead to choices that they will be happy with in retrospect. Large price increases can give someone just the push they need to try an alternative that they had never seriously considered before. If you have never cycled to work, you might try it now. And if it works out surprisingly well, you may find that you don’t want to go back to the old situation.”


Collective impoverishment
So we should see the high prices for energy and food, among other things, as a blessing in disguise? Kalshoven does not want to go that far.

“Whichever way you look at it, we are dealing with a collective impoverishment in the Netherlands. We used to be a gas-exporting country. But now we have to buy more gas from abroad, and because gas has become more expensive, that leads to a loss of terms of trade. At an individual level, the effects of this can be very dramatic. It is clear that the current situation, in which high inflation forces lower spending, has mainly downsides, but we cannot deny that there are also some bright spots.”