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  • April 27, 2021
  • |Blog
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COVID-19, “9 effects of the pandemic on finance and consumers.”

Correct me if I am wrong, but I think we are going through a third “mini” lockdown here in Cyprus – at least a mini lockdown is what is promised this time – and I am completely sure you feel exactly the same way as I do; being tired and out of patience of being promised of things that will never happen.

As we enter the second year of the pandemic, every aspect of economic activity has suffered and continues to experience severe consequences. Let’s see why the pandemic has traumatized the financial state of the island and the consumers as well.

  1. The pandemic itself causes anxiety and often a sense of fear. Health measures to limit its spread inevitably further the psychological factor in the population. For example, conditions such as being confined indoors, being isolated from relatives and friends, limiting social interactions, teleworking from home, and spending too much time in front of digital screens can greatly affect people’s psychological well-being. This means that a person is unable to think clearly in order to make purchasing decisions which affects the good mood of the consumer.
  2. The extensive loss of income for many categories of consumers limits their purchasing capacity. This is more reflected in the consumer’s purchasing of goods that fulfill basic needs or are related to the pandemic emergency living conditions. Consumer interest is inevitably focused on products and services that respond to the living conditions imposed by the pandemic and health measures. It is no coincidence that there is a growing demand for supermarket items, pharmacy items, ready-to-eat delivery, and digital home entertainment services.
  3. Consumers are not able, even if they have the financial capacity, to enjoy various luxuries such as traveling, going to the cinema, gym or restaurants, which are forced on them in conditions of confinement and social distancing. It is reasonable to assume that this expenditure will be partly allocated to material products, either as a substitution process, for example purchasing exercise equipment at home because gyms are closed, or as a consequence of freeing up funds like using the money of the trip that was not made in order to buy a new computer.
  4. Changes are taking place in the way consumers choose retail stores for their purchases. The main change occurring because of the pandemic in the retail trade is of course that consumers turn to online stores and online shopping. It should be noted, however, that consumers who shop in brick and mortar stores now prefer local, neighboring stores, the transition to which does not require private and mainly public transport. These developments benefit the companies with successful online stores and efficient shipping methods.
  5. An individual’s purchasing behavior becomes inevitably more scheduled and much less impulsive for three reasons. First, in a pandemic, there are fewer opportunities and natural incentives to make spontaneous purchases or take instant purchasing decisions. Second, hurried buying decisions are encouraged by the good mood of the individual. Third, the consumer’s shopping behavior is exacerbated by financial problems, in the sense that individuals try to cope with income constraints and a tighter budgeting plan of how much and on which products to spend.
  6. Sanitary restrictions and social distancing measures are currently holding back the development of the so-called “sharing economy“, where access through a digital platform replaces the ownership of certain material goods, such as vehicles and accommodation. Sharing systems were supported by digital technology and were aimed primarily at consumers who could not or did not want to own this specific type of goods.
  7. Psychological and financial pressures discourage consumers from taking risks or facing uncertain outcomes in their purchasing decisions. There is no willingness to experiment and test, as consumers become more cautious. This tendency is reinforced by two interrelated factors: a) the fact that the internet makes it easier to search for information and compare alternative products before buying, and b) the fact that people that are confined indoors spend much more time online.
  8. Luxury products associated with conspicuous consumption unavoidably experience a decline in sales for three reasons: a) the restriction of social contacts nullifies the role of these products as symbols of prestige and economic power, depriving them of opportunities for their public use, b) a significant part of the consumption of luxury goods is due to purchases by tourists in brick and mortar retail stores, c) the decline in income affects the sales of luxury goods, which in fact comes from a fairly diverse clientele, characterized by a greater tendency towards ostentatious consumption and less unwavering economic strength.
  9. The pandemic caused a disturbance in the international supply chain. Political and competitive pressures on companies are increasing for greater domestic production and less reliance on uncertain and susceptible sources of supply. These supply-side developments meet and reinforce an already formed consumer preference for domestic and local production, which preceded the pandemic. This is a hidden opportunity for the productive reconstruction of a country that faces a breakdown in the production chain and it is crucial to regain a role in agricultural and industrial production.

To sum up, we need to pay attention to the psychological factor that is crucial for the consumer and the financial behavior of individuals. The end of the pandemic and the end of the restraining measures will result in a rapid improvement in the consumer’s psychology and confidence and restore the consumer’s interest in the markets that have been stricken the most and that are linked to external and social activities. And while the consumers’ desire to return to their former way of life will be immense, the cumulative damage to the economy will be an obstacle that will need to be restored.

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