Consumer spending across the eurozone remains subdued, casting doubts on the region’s economic recovery. While the European Central Bank (ECB) had hoped for a resurgence in consumption to boost growth, the data suggests that households are still holding back. This hesitation to spend is now posing significant risks to the broader economic recovery and intensifying discussions about further monetary easing.
The 20-member bloc, which showed resilience earlier this year, is now seeing growth stall. Manufacturing continues to struggle, and households have yet to fill the gap with robust spending. With consumer sentiment lingering below pre-pandemic levels, the question arises: will the economic rebound driven by consumer activity ever materialize?
As inflation edges closer to the ECB’s 2% target, some policymakers are considering further interest rate cuts to stimulate the economy. Should consumer weakness persist into 2025, pushing inflation below target, the ECB may be forced to take more drastic measures to re-ignite growth.
“Sluggish growth seems to be an increasing concern for the ECB,” says Simon Wells, chief European economist at HSBC. “Soft consumption could push policymakers toward a more dovish stance.”
On paper, the conditions for a consumer-driven recovery seem favorable: inflation has fallen from a peak of 10.6% to just 2.2%, unemployment is at record lows, wages are outpacing price growth, and mortgage rates are falling. “Inflation has been significantly reduced, and rate cuts are already in motion,” says Martins Kazaks, head of Latvia’s central bank. “This is good news for consumers as their purchasing power begins to grow.”
Despite these positive developments, consumer spending has remained muted. Household consumption fell by 0.1% in the second quarter of 2023, according to Eurostat, with Germany seeing an even steeper decline. Confidence among German households has faltered amid job cuts and rising corporate insolvencies. Volkswagen’s recent announcement that it may close plants in Germany for the first time in its 87-year history is a stark example of the challenges facing Europe’s largest economy. “We expected consumption to drive growth in Germany, but that has not materialized yet,” said Olaf Roik, chief economist at the German Retail Federation. “Our hopes are now pinned on the second half of the year.”
Southern Europe, although faring better, also faces challenges. Countries like Italy and Spain are rolling back cost-of-living support, which had previously bolstered household spending. “Fiscal policy may become less favorable for households next year, as governments work to reduce their debt,” warns Coface economist Laurine Pividal. The scaling back of fiscal support could dampen household confidence and consumption.
For the eurozone as a whole, weak consumption is putting the ECB’s growth forecast of 0.9% in jeopardy. Retail sales underperformed in the third quarter, rising just 0.1%, signaling that households remain cautious in their spending.
“Nominal spending expectations are at their lowest since February 2022, when Russia invaded Ukraine,” according to the ECB’s monthly consumer survey. ECB policymakers raised concerns about this during their July meeting, especially noting the increased savings rates in early 2024, which questioned the consumption-driven recovery narrative embedded in the ECB’s projections.
Analysts surveyed by Bloomberg predict that the ECB will lower its economic growth forecasts when officials meet this week, raising the likelihood of further rate cuts. Bank of America analysts suggested that 50 basis points of easing over the rest of 2024 is a “lower bound” if economic activity continues to disappoint.
Fitch Ratings adds that real household income remains below pre-pandemic levels, which partly explains the depressed consumption levels. However, the agency still sees conditions for a recovery, anticipating that improved household incomes will eventually lead to stronger eurozone growth.
While the current outlook is clouded, some economists believe a turnaround is on the horizon. According to the Bundesbank, rising wages should begin to drive household spending in the coming months. Similarly, Dorian Roucher, an economist at France’s Insee, suggests that consumers are gradually adjusting their behavior in response to the recent drop in inflation, although their shift was much quicker during the inflation spike.
Analysis:
For investors, this subdued consumer sentiment across the eurozone raises both risks and opportunities. Weak household spending could weigh on sectors like retail, automotive, and real estate. However, if further rate cuts materialize, bond markets may rally as yields decline, offering potential upside for fixed-income investors.
Meanwhile, industries that benefit from government support or that align with household savings trends—such as essential services or discount retailers—may outperform as consumers continue to prioritize value. Moreover, tech and green energy sectors, bolstered by ECB policy, could offer long-term growth opportunities as Europe pushes forward with its digital and green transitions.
In the near term, monitoring ECB actions closely will be crucial for gauging market direction. A more dovish stance from policymakers may spur risk assets, but only if economic data shows signs of bottoming out.
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