Consumer confidence is at recessionary levels
Since the start of the war in Ukraine, consumer confidence has plummeted. Worries about war, soaring inflation and a weakening economy are rapidly returning uncertainty to consumers. The decline in confidence has brought the eurozone back to levels last seen at the height of the first lockdown and is historically consistent with recessionary levels as shown in Chart 1. Although every economic episode is different – and we don’t We wouldn’t dare to base a call for recession solely on this graph alone – there are good reasons to expect a significant slowdown in household consumption due to the historic decline in real wages that the eurozone is currently experiencing. experience (Chart 2). While the first quarter is already showing a drop in household consumption, is a consumption recession brewing?

Poor retail sales, but also just back to trend?
Retail sales have fallen in recent months, peaking in November 2021, after which sales trended choppy downward. This is understandable given the rapid erosion of real wages, but we should also note that sales had been above pre-crisis trend for most of 2021, which can be explained by the inability to spend as much on services as consumers were accustomed to (think vacations, restaurants, etc.).
This leaves the question of whether we are simply returning to the pre-crisis trend or whether weak sales are a sign of a slowdown in consumption. Chart 3 shows that retail sales have been developing below trend since the end of last year and data from April suggests a further pullback from trend. This suggests that the most recent developments show a weakening that goes beyond a simple trend correction.

Mobility seems favorable in 2T thanks to the early drop of Omicron in 1T
But while retail sales are currently disappointing, the economy is still benefiting from the effects of reopening. Google mobility data suggests a continued increase in activity since January, which follows the winter decline in activity related to the Delta variant and the start of Omicron. A big caveat in this data relates to seasonal factors, as the holidays contributed to weak activity in January. Either way, the move has been so supportive that it confirms expectations of stronger domestic economic activity. At this point, the Eurozone is back above “normal” in terms of daily movements to shops, leisure and workplaces, slightly outperforming the summer of last year.

The effects of the reopening stimulate the activity of services
Thanks to strong mobility data, it is important not to extrapolate retail sales to total consumption at this stage. Consumption of services, especially tourism-related activities, rebounded vigorously as corona restrictions and fear of the virus waned. This translates into a shift in spending that could play favorably for consumption in the second quarter and perhaps in the summer.

After two years of missing holidays abroad or frequenting restaurants and bars, people seem keen to make up for lost time and may be looking at their bank accounts less due to the exceptional circumstances of recent years. There is little current data, but overnight stays have been rapidly catching up in most eurozone economies, while survey data suggests very strong activity in the travel, hospitality and hospitality sectors. ‘accommodation. This indicates that Eurozone consumption has seen a significant tailwind from the effects of the reopening, even though the actual restrictions were already eased some time ago. Today’s PMI numbers for services, however, suggest slowing growth in these consumer-related services, so the question now is how long these tailwinds can last.

The savings surplus resulting from the pandemic is rapidly eroding
With a weak services PMI in June, the question becomes more important as to how long this reopening effect can continue. The main wildcard for continued high spending as real wages fall comes from savings. The pandemic has led to an unprecedented increase in the savings rate, leading to a large savings glut. Savings numbers go all the way back to the fourth quarter of 2021 so far, which means the latest data is still missing, but even if the savings haven’t been depleted so far, they’ve been hit hard.

The inflation rate will evaporate significant parts of it and on top of that, assets have taken a hit. Retail investors flocked to the stock and crypto markets to invest some of the excess savings they had, which recently fell significantly.

Furthermore, savings seem to have been accumulated mainly by high-income groups, that is, groups that generally have a lower marginal propensity to spend. This means that the increase in the amount that will flow back into the economy will be limited. Overall, with savings having been eroded by inflation and investment losses, as well as unfavorable distribution across income groups, it does not look like we can count on continued high spending for long.

Consumption seems to have its last hurray
The message around domestic consumption in the euro zone seems complicated at the moment. Low confidence figures and historic real wage declines suggest that households should consume less. At the same time, the relaxed behaviors related to the coronavirus continue to give a boost to the economy in the short term, with spending mainly related to tourism performing very well. This is also reflected in much stronger mobility data, generally correlated with improving domestic economic activity.

Consumers are able to spend a little more partly thanks to improved savings during the pandemic, but this is limited due to falling asset prices and imbalanced savings across income groups . This means that consumer weakness is around the corner. A strong tourist season could boost it until the summer, but sluggish consumption, at least, should kick in afterwards.
Source: ING