Prospects for a recovery in Europe hinge on consumer behavior, but with European consumers having faced tough economic conditions for over half a decade, spending trends are not encouraging.
European consumers have been confronted with tough economic conditions for more than half a decade now due to three crises: the financial crisis, the euro crisis, and the recession. The prospects for a recovery in Europe critically hinge on consumer behavior and how it will develop as it represents the largest part of GDP in the Eurozone.
With considerable differences between the member countries, individual consumption accounts for around 70 percent of GDP in the Eurozone.1 What distinguishes the current recession from cyclical recessions is not only the length and depth, but also the unusually high economic uncertainty and its negative impact on consumption.
Among the four big Eurozone economies—Germany, France, Italy, and Spain—consumers deal very differently with this situation. This is mainly due to two reasons. First, disposable income patterns have been diverging after the financial crisis. Second, private consumption has been influenced not only by disposable income, but by very different levels of household deleveraging.
Disposable income and consumption trends
Consumption critically hinges on the dynamics of disposable income. In the Eurozone as a whole, disposable income stagnated in the financial crisis and then started to grow moderately after 2009 (see figure 1). While Germany and France saw stronger increases, Italy and Spain have experienced a double dip in disposable income. After negative dynamics in the first part of the crisis, a short-lived recovery set in, but after 2011, both countries saw a fall in disposable income again.
The developments before and after the crisis diverge significantly. Before the crisis, there were considerable differences in disposable income growth, especially between Spain and the other countries, but the trend proceeded in a quite uniform way across the bigger Eurozone economies. After the crisis, the divergence between France and Germany on the one hand and Spain and Italy on the other has been growing significantly.
During the recession, private consumption in the Eurozone largely followed the development of disposable income (see figure 2). In the case of Spain, the story is different. While disposable income declined continuously after 2009, private consumption recovered and grew shortly, before it fell again quite sharply.
The reason is very likely that Spanish consumers hoped for a short-lived recession and increased consumption in anticipation of better times ahead. Now that the recession is still around, consumption is falling again. Private consumption in Italy shows a similar pattern; however, in Italy the drop during the financial crisis was much milder than in Spain.
In a recession, consumers cut their expenses not across the board, but tend to focus their cuts on durable goods, such as cars or furniture (see figure 3). This is especially the case when the recession is accompanied by great economic uncertainty that suggests a wait-and-see strategy for expensive and non- essential goods.
This pattern is clearly visible in the reaction of European consumers to the recession. The consumption of durables fell the sharpest in 2009 and took the longest to recover. The decline in durable goods was even sharper in Spain, where they dropped by more than 9 percent. Data are only available until 2011, but the general consumption trends outlined above would suggest a reversal of the upward trend that set in after 2009.
What distinguishes the current recession from cyclical recessions is not only the length and depth, but also the unusually high economic uncertainty and its negative impact on consumption.
Generally, saving rates tend not to change much in the short-term as they are influenced by culture and factors such as home-ownership, access to credit, or the design and generosity of pension systems. And indeed, in the Eurozone, as a whole the saving rate has not changed much. However, country-specific developments vary widely around the average (see figure 4). Consumers can react to an economic downswing in two ways. Either they increase their savings, motivated by precautionary motives or they lower their savings to uphold consumption.
In a way, some countries did both, but at different stages of the crisis. Consumers in countries with a high saving rate—Germany and France—slightly increased or at least held it constant. Italian consumers continually lowered their saving rate. Spanish consumers, which had a low saving rate in pre-crisis times, dramatically raised it, explaining the sharp decline in Spanish consumption. Precaution was certainly a dominating motive for the increase. After 2009, the Spanish rate fell drastically and to deeper levels than before the crisis.
It seems as if Spanish consumers tried to build up buffers in the first phase, which they had to dissolve in the second phase. The key reason for this development is certainly the ongoing deleveraging process among Spanish households after the bursting of the real estate bubble. At around 80 percent of GDP in 2011, Spanish households were much more indebted than their German or Italian counterparts and at a similar level as the United States or the United Kingdom.2
Outlook: No turnaround in sight
The outlook for consumer spending for the next year is not encouraging. Survey consumer data show that households are strongly pessimistic about their financial prospects. Not surprisingly, Spanish and Italian consumers are most pessimistic; German consumers are modestly optimistic. German consumers consider it likely that they will save in the coming year, while French, Spanish, and Italian consumers do not think they will save although they think it would be recommendable.
As a consequence, the propensity of European consumers for major purchases continues to be negative (see figure 5). The plans of Eurozone consumers to make major acquisitions now and in the coming 12 months are strongly in negative territory.
Interestingly, there are huge gaps between actual and future consumption inclination in all countries. While German consumers are bullish for current consumption, the reverse is true for future consumption, while the tendency for French consumers is exactly the opposite. These gaps indicate the high level of uncertainty Eurozone consumers are exposed to.
There are several dynamics at work in the Eurozone’s consumption expenditure. The first dynamic is closely correlated to, positive or negative, trends in disposable income. The second dynamic is heavily influenced by the need for households to deleverage and it reinforces the negative trends in disposable income due to the recession, which is happening in Spain.
The still-pessimistic outlook of European consumers makes it very unlikely that consumers will buy the Eurozone out of the recession. The impulse for Economic recovery needs to come either from enterprises and their investments or from the export side; in the interest of a balanced recovery, it should come from both.
EndnotesView all endnotes
- Christine Gerstberger and Daniela Yaneva, Statistics in focus: Economy and finance, Eurostat, 2013, http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-13-002/EN/KS-SF-13-002-EN.PDF, accessed July 15, 2013. The figure includes final consumption of non-profit institutions serving households as well as ‘individual’ government expenditure such as public education and public healthcare. Without these items, household final consumption amounts to 56.5 percent of GDP.
- “Economic Surveys: Spain,” OECD, Paris, 2012.