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Riding the sleigh of Commerce Claus

Riding the sleigh of Commerce Claus

Christmas is no longer just a religious festival; over the years, it has become more of a celebratory holiday for spreading love and cheer.  It is the most awaited time of the year, not just because you get to spend quality time with your loved ones or exchange gifts with them but also because businesses count on this period to improve their financial performance for the year through large sales volumes.

A watershed year for festivities

Pandemic-induced lockdowns in 2020 and restrictions in 2021 created a unique dynamic that saw online businesses take centre stage while physical stores faced an uphill battle. Supply chain bottlenecks, record-high inflation, and a lack of consumer confidence were pain points that weighed on festivities, which both consumers and businesses have had to deal with.

Personal and household finances have also come under considerable pressure, limiting consumerism. The year 2022 seemed like it was going to be a breath of fresh air for all and sundry till Russia invaded Ukraine, sending shockwaves to global pricing mechanisms. The inflation and interest rates were increasing toe-to-toe, more complex logistic gridlocks were created, and climate & rising energy costs intensified pressure on already battered family incomes, culminating in a full-blown cost of living crisis that has lasted for another two years.

With inflation and interest rates easing in a few countries, a sense of tradition would be the springboard needed to propel greater consumption levels – compensating for lost time from previous years.

The Gift of Christmas

The Christmas season comes with its economic benefits. Most countries experience the Santa Claus Effect in their economies where the last quarter of the year records a boom driven by Christmas-induced demand expansion. Generally, online and brick-and-mortar retailers receive a huge sales boost in the Christmas season with a consequent profit surge. Both production and consumer spending are at their peaks in this period, with positive knock-on effects on multiple industries in the service economy. From decorations to gifts, food & kitchen utensils, clothing, transport, and accommodation no service industry is left behind in the lift-off.

Due to increased demand and footfall, employment is provided for many retail employees during the Christmas season, often at a higher pay rate. Higher client traffic – online and in-store – keeps employees very busy and sometimes requires businesses to hire more hands to handle restocking, customer complaints, questions & queries, cleaning, security, etc. Many people employed in retail, logistics, and hospitality rely on this income windfall from Q4 to bolster their annual income. And as more people are smiling at the bank with their bumper pay cheques, so is the government.

Christmas or Grinchmas?

While many businesses go into the Christmas season with bells on, those who do not get it right may record cash flow constraints with unsold goods straining their finances. The pumped-up spending from Christmas time is usually followed by a post-holiday slump through the first quarter of the new year – a not-so economically efficient trajectory. Most consumers start the new year in recovery mode by cutting back their spending, causing a slowdown in business sales and overall economic productivity. Many businesses experience financial strain during this period and, in extreme cases, may face insolvency. Having the economy rise and slump in this manner can adversely affect broader economic stability, triggering a domino effect that can unravel other unpleasant economic outcomes.

The “benefits” of Christmas commerce to the economy may also be a misjudgment that hurts the economy rather than help it. The seasonal spending in the “magical quarter” can leave the economy worse by propagating unproductive expenses, as it could very much be pent-up demand held back from previous quarters to take advantage of deals and discounts provided by suppliers in the holidays that lead up to Christmas, and through the Christmas season. This means that Christmas merely concentrates consumer spending at the end of the year, rather than creating additional spending on its own – which will have been a real economic benefit. Ironically also, a sizeable chunk of the consumer spending is often channelled to non-essential industries such as electronics, entertainment, jewellery, etc. which have a comparatively lower contribution to employment and income than essential industries.

Can we even evaluate the economics of Christmas without evaluating the deadweight loss of gifts that stems from the differing preferences of gifters and giftees? The worth of a Christmas gift lies in its significance to the recipient, not in its cost. Research has shown that most people who receive these gifts are pleasantly surprised but do not like them. Even the surprise factor wanes over years of practicing Christmas gifting. As a result, the value of gifts to their recipients is typically far lower than the money spent on them, and this differential is the deadweight loss.

So, will it be a merry Christmas?

Indeed, the most magical season of the year is Christmas – until you are caught in the shockwave of its frictional costs. Amid economic uncertainty and tight finances, retailers will ride the lipstick effect wave as consumers treat themselves and their loved ones to more affordable luxuries. Besides, Christmas spending is more of a gauge for economic health, rather than the cause of it. A healthy economy gives consumers more money to spend during Christmas, not vice versa.

Also, the social obligation of Christmas comes with multiple benefits and costs, some of which are immeasurable. While the sticky prices of goods and services due to higher demand are measurable, misgiving does no good for the gifter and giftee, neither does the frustration from traffic queues, the pains of indigestion, nor the hangover from excessive alcohol consumption. So, as you eat, drink, and make merry, I hope that the Holiday Spirit will induce outcomes that will stimulate the economy’s animal spirits.

Nonetheless, I wish you a holly jolly Christmas and a peaceful and prosperous New Year.

 

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