Currently, in the eurozone, local consumers are not demonstrating a high level of activity in the context of their spending and have not yet signaled a willingness to expand the scale and scope of appropriate financial actions, against which fears are spreading about the prospects for economic recovery in this region, which is now characterized by what can be called a lack of growth incentives.
It is worth noting that the high intensity of what is happening in the consumer sector as a kind of space for commercial processes is often the main or one of the main factors of the upward economic dynamic. Many experts were betting that the corresponding space would become a platform for growth in the eurozone. However, the European consumer sector is currently in a configuration that does not contain signs that the above-mentioned expectations will become a reality.
In the first half of the current year, 20 eurozone countries experienced economic growth. As of today, there is a clear slowdown in the appropriate process.
Currently, the manufacturing sector in the eurozone is in a condition that corresponds to the concept of decline. Also in this region, households are in a difficult situation, having difficulty overcoming the financial challenges of the economic dimension of the present historical moment. There is also a lack of optimism in the eurozone regarding the prospects of the future among residents. Citizens of the countries of this region, in the context of assessing the perspectives of the economic dynamic, demonstrate sentiments that are characterized by a higher concentration of pessimism compared to the content of relevant opinions before the coronavirus epidemic.
Currently, in the mentioned part of the world, inflation is on a trajectory towards the European Central Bank’s (ECB) target of 2%. In August, the corresponding indicator, measured by the Harmonized Index of Consumer Prices (HICP), was 2.2%. Against the background of this dynamic, some ECB officials hold the view that the current condition of the economy should be interpreted as an argument in favor of continuing monetary policy easing. The European financial regulator started cutting interest rates in June. At that time, the ECB lowered the record-high deposit rate by 25 basis points, after which the corresponding indicator was 3.75%.
If the current state of affairs in the eurozone economic system persists next year, inflation in this region may fall below the target of the mentioned financial regulator. According to investors and analysts, in the context of the specified situation, a more drastic easing of the ECB’s monetary policy strategy may be necessary.
Simon Wells, chief European economist at HSBC, says that sluggish economic growth seems to be increasingly concerned about the mentioned financial regulator lately. According to the expert, moderate consumer activity may lead to a softer approach by the ECB in the context of monetary policy.
At the same time, it is worth noting that at present the statistical data shows in favor of significant prospects for increased consumer spending. In this context, it should be noted that inflation, amounting to 2.2%, demonstrated a large-scale decline compared to the peak level of 10.6%. The unemployment rate in the eurozone is also gradually decreasing. In July, the corresponding figure was slightly more than 6.4%. In June, the unemployment rate in the eurozone was fixed at 6.5%. In July 2023, this figure was 6.6%. Moreover, in the eurozone, income growth is outpacing the pace of the upward dynamic in the price area. Besides, the easing of monetary policy, which the ECB has already begun, contributes to the reduction in the cost of mortgage loans.
Latvian central bank chief Martins Kazaks said last week that the main thing is that inflation has actually decreased significantly and interest rates are also on a downward trajectory. According to the expert, this situation is positive for the population, as purchasing power begins to show growth.
At the same time, the mentioned factors and the double increase in spending related to the European Football Championship in Germany and the Summer Olympic Games in France, in general, expenses continue to remain at a low level. In the second quarter of the current year, household consumption in the eurozone decreased by 0.1%. The relevant information was published by Eurostat last week.
It is worth noting that in the second quarter of 2024 in Germany, the largest of the 20 eurozone economies, the decline in household consumption was more intensive than the average. It is worth noting that since then, the confidence of the mentioned households has fallen amid corporate insolvencies and layoffs. Last week, Volkswagen AG made a statement contributing to an even greater deterioration in sentiment in the context of the assessment of the condition of the German economic system and its prospects. The car manufacturer announced its intention to close plants in the domestic market for the first time in its 87-year history.
Olaf Roik, chief economist at the German Retail Federation, said that initially there was an expectation that consumption would contribute to the growth of this country’s economy but so far such a scenario has not been realized. The expert also noted that now the mentioned expectation is associated with the second half of the current year.
The situation in the southern part of the eurozone is currently better than in many other geographical sectors of the region, but this does not mean an absolutely positive situation or something that can be described as a condition without any sensitive and significant problems. For example, nowadays in such countries. Like Spain and Italy, local governments have decided to reduce spending on cost-of-living relief.
Coface economist Laurine Pividal says that currently, households can expect that fiscal policy will change next year, as a result of which this system of norms and rules will become less favorable. The expert says that these expectations are related to the fact that every economy should make efforts to decrease its debt. Laurine Pividal also noted that there are currently government support programs are drying up. According to the expert, the relevant tendency may become a factor impacting the content of household expectations regarding potential changes in tax policy on the part of the authorities.
In general, currently for the eurozone, consumption in its present configuration, in terms of the scale and intensity of the process, is what can be called a kind of economic Achilles heel. Against this background, doubts are growing about the prospects for the materialization of the ECB forecast, according to which gross domestic product (GDP) growth in the mentioned region in the current year will be 0.9%. It is also worth noting that there are already statistical data indicating a low level of prospects for the implementation of the specified expectations of the European financial regulator. At the beginning of the third quarter of 2024, in July, retail sales increased by only 0.1%. The relevant data was released last week by Eurostat and became a signal that the real state of affairs in the context of the dynamic of the mentioned indicator is less optimistic compared to preliminary forecasts.
The results of the latest monthly consumer poll conducted by the ECB indicate that expectations for nominal spending are at their lowest level in the last two and a half years. It is known that officials of the mentioned financial institution based in Frankfurt am Main discussed the relevant issue during the July convened. The report on the results of this convened notes that a significant increase in savings at the beginning of the current year caused questions about the concept based on consumption and embedded in the forecasts. At the same time, ECB officials concluded that the prospects for economic growth, which the financial regulator initially described as realistic and in this context focused on consumer activity as a source of positive momentum, continue to be relevant.
Analysts, interviewed by the media, are less optimistic about the mentioned issue. In their opinion, the state of affairs that determines the content of the current economic reality in the eurozone, in the short term, will still force the ECB to revise its forecasts regarding the dynamic of expected growth towards a more moderate pace and scale of positive upward movement. Experts interviewed by the media suggest that already during the next meeting of officials of the mentioned financial institution, scheduled for this week, the assessment of economic rise will be lowered. In their opinion, the ECB will begin to forecast more modest growth. It is worth noting that against the background of a likely downward revision of the forecast regarding the rising economy in the eurozone, the level of realism increases that in October the financial regulator will make an additional decision on cutting interest rates. It is worth noting that similar actions by the ECB in the context of the implementation of the monetary policy easing strategy in September and December are perceived by investors as actually resolved issues awaiting implementation.
Analysts at Bank of America estimate an additional lowering of the cost of borrowing by the ECB as likely. In their opinion, the corresponding move may be considered by officials of the European financial regulator if statistical data on production output show unsatisfactory indicators, which are a clear risk near term. Analysts at Bank of America stated that cutting interest rates by 50 basis points, which is equivalent to the scale of two standard solutions for lowering borrowing costs, is the lower bound until the end of the current year, given the obvious lack of growth in activity.
Currently, in the eurozone, real household incomes are observed at a level that is lower than the levels recorded at the end of 2019. It is worth noting that a decrease in consumption in the context of the present factors and circumstances of economic reality is not extraordinary or atypical from the point of view of such a parameter as compliance with the moment. People tend to make spending decisions very carefully and thoughtfully against the background of the lack of significant GDP growth and still unclear prospects. It is obvious that the eurozone economy has not yet demonstrated a confident recovery and does not contain reasons for unequivocal confidence in the future. Also in this context, it is worth noting that the growth of consumer activity is not facilitated not only by the specifics of the regional situation but also by the state of affairs at the global level. Currently, uncertainty as a characteristic feature is observed throughout the world economy. Moreover, growing geopolitical tensions are a factor in exacerbating the global negative tendency. The EU and the United States have largely recovered from the inflationary shocks of 2022-2023. At the same time, the rebound of the economic systems of these regions is still not what can be called a process, the implementation of which is based on a kind of solid foundation of favorable conditions and circumstances.
The Fitch Ratings agency characterizes the low level of consumer activity in the eurozone as natural. At the same time, the experts of this agency say that there are conditions for the restoration of appropriate activity. In this context, they separately note that an increase in the intensity of consumer spending will contribute to an improvement in economic growth in the eurozone.
It is worth noting that positive expectations are also spreading at the level of official institutions. There are still fixed points of view that a revival in consumer activity will occur, but this state of affairs will be observed a little later compared to initial expectations. For example, such an optimistic attitude is typical for the Bundesbank. Germany’s financial regulator said in August that higher earnings levels should increasingly contribute to rising household expenditures.
Dorian Roucher, an economist at the French statistics office Insee, says that consumers are likely to respond to lower inflation only gradually. Also, in the relevant context, the expert noted that consumer behavior demonstrates a faster reaction to a sharp rise in prices.
