Euler Hermes together with Qualetrics, an experience management company, conducted a survey between September 28 and October 21, 2020 on the impact of the Covid-19 pandemic on economic decisions and some risk perceptions, on a representative sample of 1000 people in Austria, France, Germany, Italy, Spain, Switzerland and the USA.
The Covid-19 pandemic is the latest in a series of crises that has punctuated the first two decades of the 21st century. It is, however, different from the other crises, having started in the real economy rather than the financial sector. This time around, there have also been great efforts by governments to minimize the economic blow of lockdown, such as expansionary monetary policy, temporary debt relief, targeted interventions and expansion of existing programs, wage subsidies and temporary tax relief.
More than 55% of respondents reported the pandemic to be the most impactful economic event of their lifetime. Differences between the countries mainly reflect the depth of the sanitary and economic crisis, with German respondents showing the highest level of resilience. Only 20.0% of them reported having lower income because of the pandemic (against 30.0% for the total sample). There are, however, two aspects all countries have in common: women and millennials have been disproportionately affected by this crisis. 37.8% of millennials against 27.2% of non-millennials had to cope with lower in-come. The gender gap is equally large: 32.7%% of female respondents saw a significant drop in their income against 27.1% of male respondents.
Financial knowledge is a critical factor that explains why one segment of the population is better able to cope with the shock compared to others. However, our results show the level of financial literacy is disastrously low. To measure the level of financial literacy, we asked four questions relating to different financial skills: numeracy, interest, accounting and inflation. Overall, only 28.5% of all respondents answered all four questions correctly. Even more alarmingly, we found a financial literacy gender gap in all countries: 36.4% of the men we surveyed were financially literate compared to 20.7% of the women in our sample. This added to the greater financial impact on women and creates a perfect storm scenario for the pandemic to become a “she-cession”. The level of risk literacy is also (very) low (22.8%) and the gender gap pervasive (9.6 percentage points). But our survey could not prove the hypothesis that our risk profile is determined by our risk literacy: high-risk aversion could be found among “literate” as well as “illiterate” respondents. The on average higher risk aversion among female respondents points at other, undetectable factors like personality or social role expectations.
Nevertheless, higher financial literacy seems to lead to better-informed investment decisions in times of negative real interest rates. Thus, financially savvy savers are more likely to avoid falling into the trap of investing in supposedly safe but loss-making assets in times of negative real interest rates.
And what does this now mean for policymakers and the finance industry? The disastrously low levels of financial and risk literacy are a call for action. The investment environment was challenging even before Covid-19 hit economies and markets. It has become more difficult ever since. Without sound knowledge, many households are doomed to make the wrong financial decisions, with devastating consequences for the financial well-being in the future. The upshot: Financial literacy should become part of the normal curriculum for schools and the industry should double down its efforts for simple, easy to understand products.
Looking into household`s minds
Households have a great influence in the overall economy. Skyrocketing savings caused de-creased demand and thus further affected the economic slump in the spring, while the return to shopping and travelling led to the equally forceful rebound over the summer. Going forward, the decisions of households – whether to save or spend – will be decisive, not just for their own financial well-being and the trajectory of economic growth, but also the monetary and financial stability of their countries as households’ resource allocation also affects market prices. Finally, the ability of consumers to make informed financial decisions improves their ability to develop sound personal finance. Thus, as we navigate increasingly uncertain times, the decisions households take going forward will be crucial, not only to their financial well-being, but also to the economic stability of their countries.
Based on these insights, we decided to conduct a survey to decipher the thoughts and motives that are driving spending and saving decisions at this critical juncture in time.
Across Europe, despite high levels of social protection in terms of social spending as a percentage of GDP, our results show that the Covid-19 crisis dwarfs all other crises in the magnitude of its impact on households, with 62.9% of respondents affected overall. The only exception is Spain: 22.9% of our total Spanish respondents considered the GFC, i.e. the implosion of the Spanish housing bubble, to have had a more long-lasting impact on their financial prosperity (against “only” 55.2% of respondents that say that Covid-19 has had the most damaging effect). Given that they went from the 2008 crisis straight into the euro crisis with no breaks in between, this out-come is hardly surprising. In contrast, 28.8% of all German respondents reported not having been affected by any of the crises in the last two decades, showing the highest level of resilience in our sample (Figure 1).
The other two countries with relatively high crisis resilience are Switzerland, where 23% of total respondents also said they had not suffered from any crises spanning from the dot-com bubble to the pandemic, and Austria, with 20.5% of respondents being unaffected.
In the U.S., the policy approach to preserve household stability is structurally different, resembling more of an ad-hoc cash transfer program than a welfare state measure.
Figure 1: Question: Which economic crisis / shock would you consider would have the most long-term impact on your wellbeing and/or economic prosperity? Please choose one (in %).
The Covid-19 pandemic has also magnified the pre-existent divides across countries, with women being more impacted, on average, than men. Some of the statistics reinforce this result: women make up more than 85% of nursing personnel, 50% of doctors, and all in all 70% of the workers in health and social sectors globally, according to the United Nations. Furthermore, women are disproportionately represented in the hospitality and services industries, which have taken the hardest hit during the lockdowns. If the jobs held by women are at risk, their financial independence and agency in their households is bound to suffer. This would translate into an enormous setback for gender equality. The differences in the responses to our survey from men and women are astounding. Even though our sample covers very high-income countries, none can claim to have gender equality. The divide, in terms of Covid-19 impact, is not that wide in countries like Austria and Switzerland. The widest gap of all is observed in the U.S. (Figure 2).
Figure 2: Share of respondents who are most impacted by the Covid-19 crisis, by sex
Figure 3: Share of respondents who saw their income increase or decrease, by country and age Figure 4 reveals again rather huge differences between the millennials and non-millennials of our sample – to the disadvantage of the former. Similarly, in Italy, 49.4% of millennials reported lower income compared to 34.3% of the other generations that were surveyed. In Germany, 27.7% of millennials reported having a de-creased income versus 17.5% of non-millennials. In Spain, Switzerland, the U.S. and Austria the differences were still there but less marked. But there is not only a generational divide. A similar rift can be seen between genders. The worst hit were women in Spain: 43.9% of them reported that the pandemic had an impact on their income versus 32.8% of men that said the same. In France, 38.8% of women reported losing income, compared to 24.3% of men. In Italy, women are also lagging behind (w: 40.7%, m: 34.7%), but the difference is less severe. Switzerland (w: 31.1%, m: 27.7%) and the U.S. (w: 29.9%, m: 25.3%) also have a difference, but equality is on the horizon. In Germany, the situation was quite gender neutral as 19.1% of men report-ed an impact and 20.7% of women. The big exception, however, is Austria, the only country in our sample that had a higher percentage of men being affected (26.4%) than women (23.3%). We can only speculate about the reasons. But one factor might be the traditionally high share of male waiters in the Austrian hospitality industry.
Why are policymakers concerned about consumption?
Household consumption typically accounts for around 60% of countries’ GDP. Therefore, whether we spend our money on goods or services or stop consuming at all is a good gauge of whether we will enter a sustained recovery or remain stuck in the doldrums, necessitating political interventions in some cases. For example, the pandemic pulled the reins on services expenditures, with social distancing allowing for only limited capacity in restaurants or changes to education plans.
We asked our subjects about how the pandemic affected their consumption. Again, the main differences we observed were by age cohort. Millennials all across the board reported seeing a larger impact on their consumption habits and a lower percentage of them claimed a smaller behavioral change. In Spain, millennial consumers were the group that had the single largest behavioral change in terms of consumption (83.5% recorded a major to moderate change in consumption due to Covid-19). The single largest age disparity happened in Germany, where 61.2% of millennials reported a significant change in consumption, while only 43.7% of the respondents from other age groups answered the same. In France, the difference between age cohorts was 13pp favoring the non-millennials (61.5%). The only country where the “age differences” are negligible is Switzerland (millennials: 52.5%, non-millennials: 51.5%) (Figure 4).
Figure 4: Share of respondents who say that the Covid-19 outbreak had a significant impact on their spending ability, by country and age
There are two different reasons behind lower consumption in a pandemic: first, out of necessity i.e. lack of income, and second out of “luxury” i.e. lack of consumption opportunities. In the latter case, “forced” savings will increase the savings rate – and in some cases quite dramatically.
The respondents who consume less of their income – i.e. those who report rising savings rates – out-number those who consume more of their income by a wide margin. In Austria, 6.4% of our subjects reported consuming a higher percentage of their income, while a little over one third (33.1%) were consuming less of their income. In Germany, the figures were 7.0% versus one quarter of the respondents. In Switzerland, one-tenth consumed more of their income during the pandemic, while 28.1% said they were consuming less (Figure 6). In a nutshell, for most respondents in the DACH region, falling income is not the main problem but rather the lack of opportunities to spend it.
Savings: for a rainy day?
On average, household saving rates have increased massively during the pandemic. While a big chunk of those savings might be “forced” savings, resulting from the decreased supply of services due to social distancing rules, some savings might also be the result of households’ decisions to try to cushion future shocks in the midst of growing uncertainty (“precautionary” savings). 16% of the respondents claim that their savings behavior remained unchanged, more so in Austria (20.0%) and Germany (20.8%) than elsewhere (Figure 5).
In contrast, 21% of the full sample increased their precautionary savings, which we see reflected in the fresh billions of euros or dollars parked in household bank deposits. Quite surprisingly, U.S. respondents seem to be the most risk-averse: The share of them turning to safer investments is twice as high as in Europe, where we do not observe major distress of the population trying to flee to safer assets. At the same time, in the U.S. (27.0%) – along with Spain (28.9%) and Italy (28.1%) – the share of respondents diving into their savings to make ends meet is by far the highest. If the situation persists, this will change into a more dramatic trend that might turn lead to house-holds acquiring debt to meet expenses. This is a clear call for policymakers to not stop financial support schemes prematurely.
How has the pandemic influenced investment interest?
Mostly, our subjects would like to keep the same coverage that they had before. However, the countries in our sample that suffered the most from the pandemic have the highest levels of interest in increasing their insurance coverage: the U.S. (17.9%), Spain (15.5%), France (14.7%) and Italy (11.2%). The DACH region shows the lowest interest in increasing coverage (Austria: 7.3%, Germany: 7.7%, Switzerland: 10.2%). Nonetheless, a surprising finding is that there is a significant amount of respondents, particularly in Italy (23.5%) and France (20.7%), that would actually like to decrease the amount of insurance coverage they had before the pandemic. In the DACH region, these numbers are lower but nonetheless higher than those for increasing insurance.
However, 25.8% of the Americans we surveyed displayed an increased interest in dabbling into the stock market. With American fintech companies growing their (fan) membership base, and creating an accessible and “gamified” experience for everyday stock trading, it seems to be in line with what they reported. However, even in the U.S., the share of respondents who would like to invest less in equities is significantly higher. In Europe, the stock market has yet to recoup the loses experienced in March this year. Therefore, it is unsurprising that the European countries in our sample show less future investment enthusiasm for stocks. There is a very small portion of our sample that would like to “reach for the yield” that the stock market currently offers.
After more than eight months since the first lockdown due to the Covid-19 pandemic, many households are facing financial challenges. While governments are trying to cushion the economic blow of the Covid-19 restrictions, they are far from sufficient to restore pre-pandemic income levels. Financial knowledge is a critical factor that explains why a sector of the population is better able to cope with the shock compared to others.
The gender gap exists in financial knowledge, too. Not only are women more prone to be financially illiterate, but also they are more likely to be in temporary, part-time and precarious employment than men are. These jobs come with lower legal protection and pay, creating the perfect storm of financial vulnerability for women. The European Institute of Gender Equality data show that about a quarter (26.5 %) of women employees across the EU are in a precarious job, compared to 15.1 % of men.
It seems that in countries like Germany and Switzerland, with higher overall levels of financial literacy (DEU: 31.8%; CHE: 31.2%), individuals are financially better prepared for an unexpected income shock, like the one caused by this pandemic. Only the more financially literate individuals manage to save the minimum recommended for rainy days, and are more likely to report a lower negative level of economic impact throughout the different financial areas (income, consumption and savings). Policymakers should place increased attention on take action in financial education. Financial trainings typically give a positive average effect on financial education.
Risk averse or reaching for the yield?
Financial risk tolerance is one of the most important factors that affects financial decisions: whether a risk is worth getting insurance, when to take a bet, to invest in the financial markets or even if that trip to the gym is worth the risk during a pandemic. There are environmental and demographic aspects that determine our risk tolerance. In our sample, age, gender, and country of residence could have an impact. To shed more light on these relations, we did a risk experiment with our subjects with a coin flip scenario8. However, we were only able to find a clear relationship between risk tolerance and gender: Generally, women seem to be more risk averse than men. But age and country of residence seem to have no systematic influence. At the same time, we expected that risk skills i.e. understanding of probabilities and diversification would have an effect on risk tolerance. The results are sobering: Only 27.6% of all respondents are “risk literate”. History repeats itself: women are still lagging behind men in basic risk skills. The gap in our sample is 9.6pp. Risk literacy is (a little) better in the DACH region, with Switzerland at the top: 33.6% of Swiss respondents are deemed “risk literate”.
History repeats itself: women are still lagging behind men in basic risk skills. The gap in our sample is 9.6pp. Risk literacy is (a little) better in the DACH region, with Switzerland at the top: 33.6% of Swiss respondents are deemed “risk literate”.
The performance of the U.S. is dismal: both men and women lag behind in risk literacy (m: 23.7%, w: 22.5%). The worst performers in gender gap terms were France (m: 32.8%, w: 25.9%) and Spain (m: 32.4%, w: 19.2%). Policy- makers in Spain should pay close attention to these gender gaps; it is a repetitive pattern that should be corrected. In Italy, women have a 9pp difference in risk literacy compared to their male peers. It is the same situation as with financial literacy. The current situation is a call for action for Southern Europe, where the economic situation and gender inequality were already deteriorating before the pandemic.
On the other hand, Swiss male respondents show an equally low level of risk aversion but are among those with the highest risk literacy. The courage of knowledge? Another example: Women in Germany are the most cautious (68.9%); there is a 10.2pp gap between them and German men, which might reflect a skills gap. Compared to other female respondents, however, the risk skills of German women are not particular weak. The risk-return relationship is not the only determinant of our financial and investment decisions. The decision process is complicated, which is why we see people in our sample with higher levels of financial literacy choosing investment instruments with “variable returns”, such as securities (stocks, bonds and mutual funds), while subjects with lower financial literacy prefer instruments that have a certain – albeit negative – return , such as deposits.