The collapse of family consumption will freeze the economy in the second half of the year

The collapse of family consumption will freeze the economy in the second half of the year

The very high prices force to limit purchases, which reduces the turnover of companies and slows down investments

Edurne Martinez

The Spanish are tightening their belts a lot. The runaway rise in prices and uncertainty about the future are forcing consumers to think carefully about their purchases before spending. Making the same purchase as last year costs 200 euros more per person, which in a family of four translates into an extra 800 euros this year, up to an average of 9,200 euros per household, according to data from Allianz. A situation that, despite some poorly calculated promises, will continue during the second half of the year, thus abandoning the hope that this would be the year out of the crisis.

Eggs cost 25% more than a year ago, milk 16% and bread 13%. But what is most striking is the increase in oil prices, no less than 45%. With this scenario, the Spaniards have no choice but to adjust their consumption habits. The consultant Kantar details that four out of 10 families look for promotions in their purchases, substituting some foods for others and preferring white brands. Until now, household spending has been reduced by 3%, but they fear that it will reach 10% in the second half because until now savings were used.

In its latest economic outlook report, the Bank of Spain acknowledges that they had not foreseen the collapse in demand that has been observed since the beginning of the year. Their projections indicate that family consumption will grow by only 1.4% this year, when only three months ago they expected 4.5%, the same rate with which 2021 closed after the collapse of the year of confinement (-12 %). But it is that the OECD goes further and anticipates almost zero growth in consumption, of 0.1% for this year, when before a strong boost (3.7%) was expected due to the release of the oversaving generated by the pandemic.

"Society is facing a perfect storm in which the cost of energy and raw materials are causing a general rise in prices, also in food," explains Ignacio García Magarzo, general director of Asedas, the Association of Distributors, Self-services and Supermarkets. In his opinion, food companies have been doing "a price containment exercise" for months so that consumers feel the pressure as little as possible and avoid a "consumption retraction similar to the one we experienced in the 2008 crisis" . So the price increase could begin to be noticed even more in the remainder of the year.

From NielsenIQ they detail that the Spanish are reducing the consumption of the products that have risen the most in price, although some, such as oil or milk, it is “difficult to stop buying them”. According to their data, families have reduced oil consumption by 1.7% after experiencing a price increase of almost 45% in May. A similar decline has been experienced by milk, which is difficult to replace with another food. But greater has been that of fruits and vegetables, of -3.3%, after having become more expensive by 8.7%. In addition, products such as pasta are sold more now than before (+7%) probably due to the rise in other more expensive products such as meat or fish, the consultant points out.

Companies on the brink

Moreover, despite the fact that the CPI for May marked a rate of 8.7% –the highest since the 1990s–, the rise compared to a year ago in the case of food is 11%. The agri-food chain as a whole is bearing a significant increase in costs that "are not being fully transferred to the consumer," reveals García Magarzo. Which makes us foresee an even more intense rise in products as the year progresses, since companies will not be able to continue assuming that loss of profit margins.

In fact, there are companies that are seeing their economic sustainability compromised in the short and medium term, assures the director of Asedas, who details that distribution companies have to work every day, they cannot make technical stoppages (like some industrial sectors) depending on of the price of electricity, now that electricity has become the main cost of most of them.

growth slowed down

The summary would be: high prices affect consumption, which in turn impacts company sales, and this means "undoubtedly lower economic growth." This is how Pedro Aznar, a professor at the Department of Economics, Finance and Accounting at Esade, explains it. In his opinion, high inflation has different impacts such as the reduction in the purchasing power of families, who must pay more for energy and food, which implies a smaller available budget for other goods and services, directly affecting the Gross Domestic Product. (GDP).

Of course, the hope that remains for us is that with a more moderate inflation "economic recovery would be easier because there is productive capacity," says Aznar, who points out that "uncertainty and high prices" are the main threats to our economy. . For this reason, although the inflationary spiral is going to have "a certain permanent character", in 2023 it will not be as pronounced as it has been up to now, which will imply that "next year will be better than this one" in terms of growth and provided that geopolitical tensions are moderated.

Tourism is currently positioned as the lifeline of the Spanish economy, at least this year. International traveler arrivals are only 8% below 2019 figures and a record summer is expected despite rising prices for transport and accommodation.

investment down

Added to this perfect cocktail is the rise in interest rates that central banks are targeting with the aim of curbing inflation, which will make credit more expensive and make investment rates fall, Aznar points out. And, of course, uncertainty, "which is always an aspect that works against investment" by holding back purchase decisions.

Source link