Private consumption in Europe, still in distress

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All eyes on the European consumer: Private consumption is key in determining the shape and speed of the Covid-19 recovery. Given the sharp setback in consumer spending in H1 2020, which far exceeded anything seen during the Great Financial Crisis as well as the Eurozone debt crisis, without a meaningful rebound in private consumption, economic recovery prospects will remain rather dim, according to a Euler Hermes research.

This explains the widespread excitement about the apparent V-shaped recovery in European retail sales that has materialized since governments across the region lifted lockdown restrictions from late April onwards. Several major European economies including heavyweights such as Germany, France, the Netherlands and the UK have returned to or even exceeded February – i.e. pre-crisis – retail sales levels.

Strikingly, the pace of the current retail recovery far exceeds what we saw in the wake of the Great Financial Crisis and the Eurozone debt crisis.


But a V-shaped retail recovery in the immediate crisis aftermath does not make a V-shaped private consumption recovery. In particular, we see three reasons why the consumer recovery in Europe will look quite detached from the trend in retail trade:


1.Retail sales ≠ private consumption: In fact, retail sales are not a very good proxy for the pulse of the consumer. After all, they make up only around 45% of private consumption, with the remainder consisting above all of housing-related expenses as well as services. It is the latter (around 25% of the total) that will be disproportionately more affected in the current crisis as “social expenditure” is cut back out of lingering contagion fears.

A better gauge for private consumption prospects is therefore consumer confidence, which still remains quite depressed, registering below the long-term average across European economies, alongside sky-high saving intentions.

2. Doomed durables – prepare for a W-formation in retail trade: The sharp rebound in retail trade has been propped up by a temporary boost in durable goods, which is unlikely to continue. For instance, furnishings and recreation & culture goods proved quite resilient in Q2 as consumers spent more of their disposable incomes on beautifying homes and gardens and setting up virtual offices during the lockdowns. Moreover, the temporary VAT reduction in Germany added additional tailwind. However, we don’t think that spending on these durables (around 11% of total private consumption), which tends to be closely related to the cycle, can remain immune to the Covid-19 downturn for much longer.

This is particularly true with unemployment set to rise further over the coming months as income-support schemes are phased out and insolvencies are expected to pick up. In fact, it is time to acknowledge that even without a meaningful second infection wave the V-shaped rebound in retail trade will turn out to be solely the first leg of a W-shaped recovery formation.

3.Mind the Covid-19 specific consumption headwinds: In addition to the usual recession victims such as cyclical durables but also clothing & footwear, the peculiarities of the Covid-19 downturn, i.e. ongoing contagion concerns, will continue to put additional consumption components under immense pressure. Covid-19 sensitive spending centers on “social expenditure” and therefore includes transportation, restaurants & hotels and recreation & culture services. These vulnerable components represent almost one fourth (23%) of total private consumption in the Eurozone. A return to pre-crisis spending patterns will therefore hinge on the availability and wide distribution of a vaccine.

Our estimates of increasing the number of insolvencies in Romania by at least 20% for the next year compared to the level of 2019 do not lead to a reassuring outlook for the retail sector either.

In Romania, in recent months there has been a return to retail trade which increased by over 4% in July compared to the same month last year, gradually recovering the decrease of almost 19% in April. “While the trend of food consumption remains in a comfort zone, there is a strong contribution from durable products, for which demand is supported only by a volatile context, namely the need to adapt lifestyle to the conditions created by the pandemic. In terms of fuels and services, the latter losing more than 40% of the previous year’s level, we can expect a slower recovery trend, amid limited mobility and an index of consumer confidence unlikely to 80% in 2020. Rising unemployment, although still not far from 5%, but with the potential to rise in the first part of next year, the trend towards more conservative household income management and the expected wave of insolvencies since the beginning 2021 are also likely to contribute negatively to availability for consumption“, said Mihai Chipirliu, CFA, Risk Director Romania.

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