European consumers reduce discretionary spending

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Consumers in Europe are starting to cut back on casual spending as rising electricity bills and interest rates push up the cost of living, the latest evidence of the region’s economic woes.

Car sales, box office revenue and hotel bookings are all falling, according to the latest indicators, as consumers quickly scale back plans for big purchases. While overall consumer spending has continued to rise in recent months, the number of goods purchased is falling as inflation falls, sales show.

Melanie Debono, European economist at Pantheon Macroeconomics, said: “Consumers are tightening their belts, saving on heating and other essentials.”

Many more have been seen since the outbreak of the coronavirus while providing a more timely presentation than what is official, although it is not complete and reliable.

Consumer sentiment has fallen sharply as economists warn that many European countries are facing a financial crisis. Despite this, the European Central Bank is continuing to raise interest rates to combat inflation. This week, it raised the rate to 0.75 percent, although its President Christine Lagarde insisted that policymakers are “not aware” of the risk of recession.

European consumers are “feeling that their purchasing power is diminishing,” said Bert Colijn, chief economist at ING. “Obviously, the consumer has to decide what to spend.”

Debono expects consumption in the eurozone to fall again later this year “as households’ incomes allow them to save more to have enough money for winter heating”.

This is despite the fact that some countries are receiving financial aid, notably France, where real incomes are rising due to rising immigration and very low wages.

The sentiment is similar in the UK. Maxim Rybnikov, an independent analyst at S&P, expects “consumer spending on contracts over the next few years, which will make the UK economy very weak”.

Nathan Sheets, global chief financial officer at Citi, expects a “recession” in the euro area and the UK by the end of this year and in the US by mid-2023.

The economies of Germany, France, the US and Spain continued to grow in the third quarter, but growth in France was driven by investment, while domestic consumption slowed. Consumer spending in Spain was more than 5 percent below its pre-pandemic level.

Growth in the third quarter was “the last run of the summer”, said Tomas Dvorak, economist at Oxford Economics. Long-term indicators show that economic activity in the eurozone is slowing down significantly and “the bloc will enter winter”, he warned.

Major purchases have been suspended

European consumers’ intentions to spend on capital goods, such as cars and houses, are at their lowest level in two decades, except in the early months of the pandemic.

line chart of the segment of those who expect to make large purchases and those who have not (enough) to show No time to spend big

Less fun

Smart use is easy cutting. In September and October, consumption in cinemas in Germany, France, Italy, Spain and the UK fell by 59 percent below the previous record, which is defined as the same period in 2019.

Hotel bookings were lower in October than the rest of spring and summer, compared to 2019 levels, according to travel agency Sojern.

Similarly, AirDNA, which tracks short-term rentals through Vbro and Airbnb, found that growth “stalled” in September, with the number of nights falling below pre-pandemic levels after the summer. Booking nights for future trips also dropped.

European box office earnings are below pre-pandemic levels

Spend more and less

Due to inflation, consumers are getting less for their money. In August, total consumer spending in the EU rose by 9 percent over the same period last year but the volume of goods purchased was down by 1 percent.

Likewise, in September UK consumers spent 4 percent more than a year earlier and 7 percent less.

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

Off road

In the UK, motor fuel prices fell by 1.3 per cent 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.

The chart showing car sales in Western Europe is not recovering

Low power

There is some evidence that consumers are responding to rising energy costs by reducing fuel consumption. In the week to October 22, gas consumption in Germany, France and Italy fell to 15 percent below the 2017-2021 average, according to an analysis of data by ENTSO-E and Barclays.

Mark Cus Babic, European economist at Barclays, said the decline “perhaps reflects efforts by European governments to reduce consumption, seeking to offset rising prices and recent heatwaves”.

This article has been updated since it was originally published to clarify that Maxim Rybnikov is an independent analyst at the S&P rating firm.