European consumers have started to cut back on discretionary spending as rising energy bills and interest rates drive up the cost of living, in the latest evidence of the mounting strain on the region’s economy.
Car sales, ticket revenue and hotel bookings are all falling, according to high-frequency data indicators, while consumers have rapidly scaled back their plans to make big purchases. Although the total amount spent by consumers has continued to increase in recent months, the amount of goods purchased is falling as inflation bites, sales data show.
Melanie Debono, senior European economist at Pantheon Macroeconomics, said: “Consumers are tightening and conserving income for heating and other essentials.”
Alternative data have been widely watched since the start of the coronavirus pandemic because they offer a more up-to-date measure of activity than official data, although they are less comprehensive and reliable.
Consumer sentiment has fallen sharply as economists warn that many European countries are facing recession. Despite this, the European Central Bank continues to raise interest rates to tackle rampant inflation. This week it introduced a 0.75 percentage point increase, although its president Christine Lagarde insisted policymakers were not “unaware” of the risk of a recession.
European consumers are “definitely feeling the purchasing power squeeze,” said Bert Colijn, economist at ING. “Clearly the consumer has to make choices about what to spend on.”
Debono expects consumption in the euro area to fall again in the final quarter of this year “as the pressure on households’ real income forces them to save more and forgo some expenses to ensure enough funds for heating this winter”.
This is despite incoming tax support in some countries, notably France, where real incomes will get a boost from rising social transfers and a higher minimum wage.
The outlook is similar in the UK. Maxim Rybnikov, economist at credit rating agency S&P, expects “consumer spending to decline over the next few quarters, leading the wider UK economy into a moderate technical recession”.
Nathan Sheets, global head of international economics at Citi, predicts a series of “rolling recessions” with declines in the eurozone and the UK late this year and in the US in mid-2023.
The economies of Germany, France, the US and Spain continued to expand in the third quarter, but France’s growth was driven by investment while household consumption stagnated. Spain’s consumer spending was still more than 5 percent below pre-pandemic levels.
The third quarter’s growth was “the last hurray of the summer tailwind,” said Tomas Dvorak, an economist at Oxford Economics. Timely indicators show that economic activity in the eurozone is slowing sharply and that “the bloc will slide into recession during the winter,” he warned.
Larger purchases on ice
European consumers’ intentions to spend on major items, such as cars and houses, are at their lowest levels in two decades, excluding the first months of the pandemic.
Cut back on the fun
Discretionary spending is the easiest to cut. In September and October, spending at cinemas in Germany, France, Italy, Spain and the UK fell 59 percent below the pre-pandemic norm, defined as the same period in 2019.
Hotel bookings were lower in October than throughout the spring and summer, relative to 2019 levels, according to travel industry firm Sojern.
Similarly, AirDNA, which tracks short-term rentals via Vbro and Airbnb, found that momentum “paused” in September, with the number of nights falling back below pre-pandemic levels after peaking at that level in the summer. Nights booked for future travel also decreased.
Spend more for less
With high inflation, consumers get less for their money. In August, total EU consumer spending was 9 percent higher than the same period last year, but the amount of goods purchased was 1 percent lower.
Similarly, UK shoppers in September spent 4 per cent more than the previous year for 7 per cent less in quantity.
Off the road
In Great Britain, vehicle fuel sales volumes fell by 1.3 percent in September. Car sales in Western Europe fell by almost a third in the 12 months to September, compared with the same period in 2019.
There is some evidence that consumers are responding to rising energy costs by cutting back on fuel use. In the week to October 22, gas consumption in Germany, France and Italy fell 15 percent below the 2017-2021 average, according to an analysis of ENTSO-E data by Barclays.
Mark Cus Babic, European economist at Barclays, said the decline “likely reflects efforts by European governments to curb consumption, destruction of demand from higher prices and, more recently, higher temperatures”.
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