European consumers cut discretionary spending

European consumers have started to cut discretionary spending as rising energy bills and interest rates drive up the cost of living, in the latest evidence of growing pressure on the region’s economy.

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

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

Alternative data has come under scrutiny since the start of the coronavirus pandemic because it offers a faster measure of activity than official data, although it is less comprehensive and reliable.

Consumer confidence has fallen sharply as economists warn many European countries face recession. Despite this, the European Central Bank persists in raising interest rates to fight runaway inflation. This week it imposed a 0.75 percentage point hike, although its chairwoman Christine Lagarde insisted that policymakers were not “blind” to the risk of recession.

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

Debono expects Eurozone consumption to fall again in the final quarter of this year “as pressure on households’ real income forces them to save more and forgo some expenses to ensure sufficient funds for the heating this winter.

This is despite fiscal support coming into some countries, particularly France, where real incomes will be boosted by higher social transfers and a higher minimum wage.

The outlook is similar in the UK. Maxim Rybnikov, an economist at ratings agency S&P, expects “consumer spending to contract over the coming quarters, dragging the wider UK economy into a moderate technical recession.”

Nathan Sheets, global head of international economics at Citi, predicts a series of “continuing recessions” with slowdowns in the euro zone and the UK at the end of this year and in the United States in mid-2023.

The economies of Germany, France, the United States 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% below pre-pandemic levels.

Third-quarter growth was “the last hurray for the tailwinds of summer,” said Tomas Dvorak, an economist at Oxford Economics. More recent indicators show that economic activity in the euro zone is slowing sharply and that “the bloc will slide into a recession over the winter”, he warned.

Large purchases pending

European consumer spending intentions for key goods, such as cars and houses, are at their lowest level in two decades, excluding the first months of the pandemic.

Reduce pleasure

Discretionary spending is the easiest to cut. In September and October, spending at cinemas in Germany, France, Italy, Spain and the UK fell 59% below the pre-pandemic norm, defined as the same period in 2019.

Hotel bookings were weaker in October than throughout the spring and summer, compared to 2019 levels, according to travel industry firm Sojern.

Similarly, AirDNA, which tracks short-term rentals through Vbro and Airbnb, found that momentum had “suspended” in September, with the number of nights falling back below pre-pandemic levels after surging above that level in September. summer. Nights booked for future trips have also decreased.

European box office revenues are well below pre-pandemic levels

Spend more for less

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

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

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

off the road

In the UK, motor fuel sales volumes fell 1.3% in September. Car sales in Western Europe fell by almost a third in the 12 months to September, compared to the same period in 2019.

Line chart showing car sales in Western Europe not recovering

Low battery

Consumers appear to be responding to rising energy costs by reducing their fuel consumption. In the week to October 22, gas consumption in Germany, France and Italy fell 15% 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 rein in consumption, destruction of demand due to rising prices and more recently higher temperatures”.

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