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The return of the European consumer
Robert Lind
  • European spending will likely increase this year, with pent up demand propelling the growth in consumption.
  • European consumers have suffered from a fall in real income, as high energy costs fuel inflation. However, the strong recovery in labour markets should underpin household incomes.
  • The gap between consumer spending in the US and Europe is likely to close in 2022, despite numerous headwinds like soaring energy costs and lower consumer confidence.

European consumer spending rebounded in 2021, but it lagged the much stronger recovery in the United States. In 2022, I expect that gap to close. Despite numerous headwinds, like soaring energy prices and falling consumer confidence, I believe Europeans will be saving less of their income this year and that there is enough pent-up demand to propel robust consumption growth.

Energy squeeze presents a challenge

In the near term, there are some obstacles for European consumer spending. Consumer confidence has dropped in all four major economies (Germany, France, Italy and the United Kingdom) for two main reasons. First, the spread of the Omicron variant late in 2021 and early in 2022 has affected consumer behaviour. In the eurozone, governments implemented some tightening of restrictions, which undermined activity.

Second, European consumers have faced an intense squeeze on real incomes as inflation has jumped over the past six months. Headline inflation rates, as measured by the Consumer Price Index, have now risen well above official 2% targets in all four economies. Notably, Germany, Italy and the United Kingdom have seen inflation rates rise above 5%.

There are many factors underpinning this rise in inflation. In Germany’s case, tax changes have pushed up the inflation rate. But there are common influences in all four economies. The largest factor across the board is that European consumers are absorbing a huge increase in energy prices.

European energy costs shoot skyward

Ce CPI gas and Electricity

As at 15 December 2021. Sources: Eurostat, ONS

Ce CPI gas and Electricity

The outlook for energy prices is likely to be critical in determining the profile of inflation through the course of 2022. Following the December spike, wholesale gas and electricity prices have dropped back, though they remain well above where they were in late summer 2021. In their inflation projections, the European Central Bank and the Bank of England assume that energy prices will fall further. On this basis, headline inflation rates should drop in 2022, alleviating the squeeze on real incomes.

In the eurozone’s major economies, headline inflation appears close to a peak, meaning relief for consumers could be coming soon. In the UK, headline inflation likely will continue to rise early in 2022 as higher energy prices feed through to consumers. Currently, it looks like UK inflation could peak at around 6%–7% in the spring, which implies an intense real income squeeze on households.

But clearly there is considerable uncertainty around these energy price assumptions, especially given developments on the Russia-Ukraine border. Colder weather over the next few months could also increase energy demand and prices.

Fiscal support and surging labour markets offer relief

Should energy prices remain high, there are two mitigating factors that should shield consumers. First, governments are acting directly to alleviate the impact of higher energy prices. The French and Italian governments have been particularly active in protecting household incomes. The new German government also appears to be considering ways of helping households. And there is growing speculation the UK government will offer more fiscal support, particularly to low income households.

Another reason I’m confident that spending will rebound is that Europe’s labour markets are now recovering strongly, which should underpin household incomes. During the pandemic, European governments implemented furlough and short time working schemes. These schemes were primarily designed to protect household incomes and jobs, which was in stark contrast to the US fiscal stimulus that gave substantial direct cash grants to households. This helps to explain the gap between US and European consumer spending over the past two years. But it also means the European labour market has been able to recover quickly as economies have reopened.

Household consumption in Europe is rebounding and closing the gap with the US

CE household Consumption

As at Q3 2021 (Germany, Italy, UK) and Q4 2021 (US and France) Sources: BEA, Bundesbank, INSEE, ISTAT, ONS

The rebound in employment has been particularly notable in France and Italy. Strong growth in employment has tightened labour markets. In the eurozone, there are some tentative signs this is now encouraging a pick-up in labour supply. And I also expect to see a recovery in wage growth in 2022, which should support household incomes, particularly in France and Germany.


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Robert Lind is an economist with 36 years of industry experience. He holds a bachelor's degree in philosophy, politics and economics from Oxford University.

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