Can the European consumer hold on?

Executive summary

• Consumers were meant to drive the post-Covid-19 recovery in 2022, but elevated geopolitical uncertainty and sky-high inflation have derailed these expectations. Following Russia’s invasion of Ukraine, consumer surveys suggest that Eurozone households are as pessimistic – or even more – as they were during the height of the pandemic. Based on the deterioration in consumer confidence, we estimate that the resulting lost household consumption in the Eurozone tallies up to EUR70bn, or close to EUR500 per household, in 2022 alone.
• Things will get worse before they get better: Our Allianz Pulse survey shows that a majority of consumers in Germany, France and Italy intend to cut back on their real consumption as well as their savings in the coming months. Based on a panel regression that takes into account consumer confidence, the unemployment rate, real disposable income, monetary and financial conditions as well as global demand, we estimate that gross savings rates in Germany, France and Italy will decline back to pre-Covid long-term averages by end-2022 (-4.7pp, -3.7pp and -4.8pp, respectively).
• Savings flows might return to normal, but the accumulated excess savings stock remains in place, even if it provides an unequal safety net. According to our calculations, the stock of excess savings currently tallies up to more than EUR380bn in the Eurozone. But heterogeneity is significant across income groups, with EUR93 per household for the lowest-income households against more than EUR8700 per household for the wealthiest. For comparison, the food bill for Eurozone households is expected to increase on average by EUR550 per household in 2022, while the energy bill is set to rise by more than EUR750. Hence, for almost two-thirds of households, excess savings will be insufficient to shield them from the inflation hurricane this year.
  

In 2022, the deterioration in consumer confidence could lead to EUR70bn in lost consumption, or close to EUR500 per household in the Eurozone.

Following Russia’s invasion of Ukraine, consumer confidence in key Eurozone countries has dropped to the lows last seen during the height of the Covid-19 crisis. Consumer confidence usually predicts trends in consumer spending with a lag of one to two quarters. Eurozone consumers already cut back their spending by 0.7% q/q in the first quarter of the year against the backdrop of fresh sanitary restrictions triggered by the omicron wave and Russia’s invasion of Ukraine. However, we believe the fall in consumer spending will continue in Q2 and Q4, with a respite only during the summer, thanks to a rebound in services consumption (mostly hospitality and travel).

Overall, we calculate that the lost consumption explained by the deterioration of consumer confidence since the start of the war stands at EUR70bn (in real terms), or close to EUR500 per household in the Eurozone as a whole. This is what households will not spend in 2022 due to the lack of confidence - not considering the effect of any fiscal transfers. Across major Eurozone economies, the loss translates into EUR20bn for Germany (or EUR470 per household), EUR13.5bn for France (or EUR440 per household) and EUR31bn for Italy (or more than EUR1100 per household) - see Figure 1. In Italy, the loss is higher as the drop in consumer confidence since the end of 2021 has been twice as high as, for example, in France.

Figure 1: Lost consumption in 2022 due to deteriorating consumer confidence (EUR per household)

Our Allianz Pulse Survey reveals that most European consumers will reduce both expenditures and savings in the coming months, notably in France.

In May 2022, we asked more than 2,500 consumers in Germany, France and Italy about their consumption plans in the coming months compared to pre-inflation times. In all three countries, a majority plan to cut back on spending: 53.5% in Germany, 58.5% in France and 54.0% in Italy. However, more than one third do plan to maintain spending levels, reflecting either the inertia usually expected in consumption after a shock or economic resilience (see Figure 2).  

Figure 2: Consumption behaviours in the coming months by country (% of total)

Overall, 36.5% of the European consumers we surveyed said they intended to save less in the coming months, with the highest share found in France (49.3%). However, in Germany, 40% of consumers intend to save as before while in Italy the ratio between those that want to keep savings constant and those that want to save more (see Figure 3) appears more balanced.

Figure 3: Saving behaviour in the coming months by country (% of total)

We expect gross savings rates to return to the status quo ante, with declines in Germany, France and Italy to 18.3%, 15.6% and 10.9%, respectively, by end-2022.

In order to establish the determinants of changes in household savings in key countries in Europe, we estimate a country fixed-effect regression as a function of the unemployment rate, which is often used as a proxy of labor income uncertainty . We also controlled for the effects of disposable income and interest rates, both in real terms, hence capturing the effects of inflation. Moreover, as household savings may also be influenced by global factors, we consider the difference between the US-German 2Y bond yields and the copper-to gold ratio as a proxy of future economic growth. Finally, we include consumer-confidence indicators, both the aggregate index and subcomponents.

Using the results of our model, we estimate a drop in the savings rates in Germany, France and Italy to the status quo ante before Covid-19: 18.3%, 15.6% and 10.9%, respectively, by end-2022. We make two important assumptions in the model: The first is relative to the unemployment rate, which we expect to remain relatively stable this year as in times of economic contraction, governments tend to adopt labor-retention policies such as partial unemployment schemes to preserve employment. The second hypothesis is in relation to consumer confidence. In our baseline scenario, we assume that the level of aggregate confidence will remain close to current levels, which are already considerably low and close to the levels observed during the Covid-19 crisis. By stressing confidence levels to the lowest levels reached in the historical series, we observe an increase in the savings rate by +0.2pp in every country at year-end in relation to the baseline scenario.

When considering the Consumer Confidence sub-components, we notice a larger discrepancy in the "unemployment expectations in the next 12 months" as it points to a higher savings level by about +0.5pp. On average, the subcomponents indicate that the savings rate in Germany comes in at 18.5%, slightly above the aggregate measure (18.3%).

Figure 4: Projected gross savings rate (%) in Germany, France and Italy

High-income households hold more than two-thirds of the EUR380bn in excess savings remaining in the Eurozone.

We calculate that there is still more than EUR380bn in excess savings in the Eurozone but it is unevenly distributed: wealthier households have a much higher share of the total. We find that the lowest-income households have excess savings equivalent to just EUR93 per household, compared to more than EUR8700 per household for the wealthiest (see Figure 6).

For comparison, the food bill in the Eurozone is expected to increase on average by dummy EUR550 per household in 2022 and the energy bill by more than EUR750, with prices dummy up by +50% over the year. In this context, for close to two-thirds of households, excess savings will not be enough to shield them from the inflation hurricane this year.

Figure 5: Household excess savings, EUR bn

Figure 6: Household excess savings, EUR per household