Research Briefing | Nov 1, 2022

Eurozone consumption recovery after hard winter is uncertain

Our baseline forecast is for consumer spending in the eurozone to fall over the next two quarters as consumption fundamentals – real incomes and employment – weaken, while soaring energy prices keep inflation high. We think consumption will then gradually recover from Q2 2023, but a weak carryover will result in a meagre rise of 0.1% in 2023 and 2.3% over 2024.

What you will learn:

  • The main driver of consumption growth in H2 2023 will be the pick-up in real incomes as inflation slows and employment growth resumes. Consumption tends to follow real income, usually less than one-to-one, but its responsiveness is stronger when GDP is catching up to trend, which we expect in H2 2023.
  • Households’ inflation and income expectations are key risks to our forecast. Inflation expectations tend to be strongly influenced by recent trends, so the historically-high rates in 2022 might motivate workers to bargain for above-average pay rises in 2023, although firms might not be willing or able to accommodate this. High inflation expectations could also weigh on households’ spending decisions, depending on how long they expect high prices to last.
  • As growth slows and the labour market cools the risk of job losses increases, so households’ precautionary savings are likely to rise. But if unemployment rises more sharply than expected or the labour market recovery is slower, job uncertainty will persist for longer and households may be inclined to retain a precautionary buffer. This could curb consumption.
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