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    Home»Business»European consumers cut back on discretionary spending
    Business

    European consumers cut back on discretionary spending

    October 30, 2022Updated:October 30, 2022No Comments4 Mins Read
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    European consumers have begun to cut back on discretionary spending as rising energy bills and interest rates push up the cost of living, in the latest evidence of the mounting strain on the region’s economy.

    Car sales, box office revenues and hotel bookings are all falling, according to high-frequency data indicators, while consumers have rapidly scaled back plans to make major purchases. Although the overall amount spent by consumers has continued to rise in recent months, the quantity of goods purchased is falling as inflation bites, sales data show.

    Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said: “Consumers are tightening their belts, preserving income for heating and other necessities.”

    Alternative data have become widely watched since the start of the coronavirus pandemic as they offer a more timely gauge of activity than official data, although they are less comprehensive and reliable.

    Consumer sentiment has dropped sharply as economists warn that many European countries face recession. Despite this, the European Central Bank is persisting in raising interest rates to tackle raging inflation. This week, it imposed a 0.75 percentage points rise, though its president Christine Lagarde insisted policymakers were not “oblivious” to the risk of a recession.

    European consumers are “absolutely feeling the purchasing power squeeze”, said Bert Colijn, an economist at ING. “Clearly, the consumer has to make choices about what to spend on.”

    Debono expects eurozone consumption to decline again in the final quarter of this year “as the squeeze on households’ real income forces them to save more and forego some spending to ensure enough funds for heating this winter”.

    This is despite incoming fiscal support in some countries, particularly in 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 rating agency S&P, expects “consumer spending to contract over the next few quarters, leading the broader UK economy into a moderate technical recession”.

    Nathan Sheets, global head of international economics at Citi, anticipates a series of “rolling recessions” with downturns in the euro area 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 per cent below its pre-pandemic levels.

    The third quarter’s growth was “the last hurrah of the summer tailwinds”, said Tomas Dvorak, an economist at Oxford Economics. Timelier indicators show economic activity in the eurozone is slowing sharply and the “bloc will slide into a recession over the winter”, he warned.

    Major purchases on hold

    European consumers’ intentions of spending on major goods, such as cars and houses, are at their lowest levels for two decades, excluding the early months of the pandemic.

    Cutting back on fun

    Discretionary spending is the most easily cut. In September and October, spending in cinemas in Germany, France, Italy, Spain and the UK dropped 59 per cent below the pre-pandemic norm, defined as the same period in 2019.

    Hotel bookings were lower in October than throughout the spring and the summer, relative to 2019 levels, according to travel industry company Sojern.

    Similarly, AirDNA, which tracks short-term lets via Vbro and Airbnb, found that momentum “paused” in September, with the number of nights falling back below pre-pandemic levels after topping that level in the summer. Nights booked for future travel also declined.

    European box office revenues are well below pre-pandemic levels

    Spending more for less

    With inflation high, consumers are getting less for their money. In August, overall EU consumer spending was 9 per cent higher than the same period last year but the quantity of goods purchased was 1 per cent lower.

    Similarly, in September UK shoppers spent 4 per cent more than the previous year for 7 per cent less in quantity.

    Line chart of EU retail sales showing consumers are spending more in shops but buying less

    Off the road

    In the UK, automotive fuel sales volumes fell by 1.3 per cent in September. Car sales in western Europe were down nearly one-third in the 12 months to September, compared with the same period in 2019.

    Line chart showing car sales in western Europe are not recovering

    Low energy

    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 to 15 per cent 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, demand destruction due to higher prices and more recently higher temperatures”.

    You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

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