Before the economy contracts and inflation continues to lower wages and pensions on its own, European consumers have already activated crisis mode in their domestic economies. A study carried out by the European Central Bank indicates that Europeans calculate that only within three years will inflation have been corrected to an average of 2.8% and that they are losing confidence in the effectiveness of the ECB's measures.
Consumers also expect the economy to contract by 1.3% over the next 12 months, in contrast to projections from the ECB, which expects inflation to average 6.8% in 2022, before falling to 3.5%. in 2023 and 2.1% in 2024. It also forecasts that growth will be 3.7% this year, 2.8% next and 1.6% in 2024. For the survey, the ECB interviewed in June to some 14,000 adults from Belgium, Germany, Spain, France, Italy and the Netherlands, countries that represent 85% of the eurozone's GDP and 83.8% of its population.
In its recently published monthly bulletin, the ECB notes that household spending is shifting from goods to services. "Private consumption decreased by 0.4% in the first quarter of 2022, and the demand for both services and goods contracted," the document testifies, noting that "it is likely that the consumption of goods by households has maintained its weakness in the second quarter, in a context of high inflation, high uncertainty and persistence of bottlenecks in the production and distribution networks of the consumer goods sector. This weakness is underpinned by the recent evolution of retail sales, which, in the period between April and May 2022, were, on average, 0.8% below the level observed in the first quarter.”
This anticipation of the recession by consumers is transferred to sales data. Car registrations in the second quarter fell 3% from the first. Consumer confidence continued to decline in the second quarter and also in July, due to persistent concerns about high inflation and the deterioration of economic and financial expectations, in an environment of high uncertainty and strong supply restrictions. However, demand continues to recover in the tourism sector, so with the lifting of restrictions, household spending is shifting back from goods to contact-intensive services, supporting short-term demand. The household savings rate grew marginally to stand at 15% of disposable income in the first quarter of 2022, mainly as a result of the impact of the restrictions associated with COVID-19 and increased uncertainty.
“Looking ahead, the increase in precautionary savings due to the uncertainty generated by the Russian invasion of Ukraine is likely to be offset by households using savings to cushion, at least partially, the negative effects of the shock to energy prices", says the ECB, which recognizes however that "the asymmetric distribution of the capacity to save among households, the growing financial worries and the related uncertainty could limit the capacity of said savings to protect the ongoing recovery of consumption from the recent spike in energy prices.
The ECB insists that the risks to economic growth continue to grow. “While risks related to the pandemic remain contained in the short term, the Russia-Ukraine war continues to pose a significant downside risk to growth. Specifically, a new disruption in the energy supply to the euro area would pose a great threat and could result in gas rationing for companies and households", predicts the European issuer, "also, the war could further worsen the confidence and aggravate supply constraints, while energy and food costs could remain persistently higher than expected."