One of the wisest things ever said was Charlie Munger’s advice to know “the edge of your own competency.” It is, he said, “not a competency if you don’t know the edge of it.” I fear that forecasters trying to predict the size and duration of the post-lockdown recovery in demand are ignoring this advice, because the truth is that we just don’t know.
Of course, the lockdown has forced many of us to save, and we can roughly estimate the scale of this. The Bank of England reports that households’ bank deposits rose by 12.3 per cent in the year to March. If we assume that in the absence of the pandemic they’d have grown at their average rate for the past 20 years, this means people have £100bn of excess cash. That’s equivalent to over 8 per cent of last’s year’s total consumer spending.
Just because people have money, however, does not mean they will actually spend it all. Before the pandemic companies had for years had huge cash piles. And for years, their investment fell short of forecasters’ predictions. The same could happen to consumer spending.