The euro zone economy is waiting for an active vote of confidence from its own consumers for a long-awaited recovery to finally take shape, the Luxembourg Times reports.
Business surveys started to inspire some hope, given record employment levels, sharp wage growth and inflation close to 2%.
At some point, consumers will have to say ‘we’ve saved long enough.’ And when the first domino falls, then hopefully it’ll take others along.
An economic rebound in 2024 would be the euro zone’s best chance to draw a line under years of turmoil, from the pandemic to the cost-of-living crisis that followed. Since manufacturing remains stagnant, policymakers are counting on household spending to drive economic growth.
Last week’s data showed that the region came out of recession, with all four of the euro zone’s largest economies growing more than expected. However, the consumption picture remained mixed, with both Germany and Italy still suffering from weak domestic demand.
According to S&P Global business surveys, activity in the euro area’s services sector hit an 11-month high in April, with rising orders indicating that this momentum could continue. Antonio Espasa, chief economist for Europe at Santander CIB, cited rising wages, falling inflation and the prospect of interest rate cuts by the European Central Bank (ECB) as drivers of demand in the second half of the year and beyond.
We’re at a turning point.
Economists surveyed by Bloomberg predict that private consumption in Spain will grow twice as fast as in the euro zone, almost as fast as in the US, where it is helping the economy expand much faster. If such effects can be repeated across the region, it would signal the recovery that ECB officials have long awaited and predicted, constantly overestimating private consumption growth.
Attempts to understand the psyche of the region’s fickle consumers have long been a major focus of the ECB. President Christine Lagarde recently described household behaviour as the biggest difference between the European and US economies, highlighting Washington’s generous pandemic stimulus measures and less concern about the crises in the Middle East and Ukraine.
It’s fiscal, it’s energy, and it’s the natural tendency of the American consumers to have confidence to spend, not to save so much.
Consumption levels will matter most in Germany, Europe’s largest economy. Households there have been among the most cautious in the region, concerned about the impact of the war in Ukraine on the country’s business model with cheap gas and political indecision. Economists at Deutsche Bank AG raised their forecast for 2024 on Friday, predicting 0.3% growth instead of a 0.2% contraction, arguing that private consumption should recover faster than they had originally forecast.
Consumption levels will matter most in Germany, Europe’s largest economy. Households there have been among the most cautious in the region, concerned about the impact of the war in Ukraine on the country’s business model with cheap gas and political indecision. Economists at Deutsche Bank AG raised their forecast for 2024 on Friday, predicting 0.3% growth instead of a 0.2% contraction, arguing that private consumption should recover faster than they had originally forecast.
After several years of negative rates, the prospect of earning money again from simple savings is also weighing on consumer demand. While total deposits have been growing more slowly than usual since inflation began to rise, deposits offering higher interest rates have increased almost tenfold in Germany and notably in other countries.
As the ECB prepares to cut borrowing costs, some incentives to save will disappear, which could stimulate spending. Policymakers have indicated their intention to cut rates by a quarter point in June, although some have so far refrained from signalling further easing.
