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Hopes of economic recovery in Europe - Findings of the GfK Consumer Climate Europe survey for the second quarter of 2011
In many European Union countries, consumer sentiment is improving for the first time since the financial and economic crisis, even though the discussions on the Greek rescue package are still creating a great deal of uncertainty. This is one of the findings of the GfK Consumer Climate Europe survey, which provides an overview of the development of economic, price and income expectations and willingness to buy of consumers in Austria, Bulgaria, the Czech Republic, France, Germany, Greece, Italy, Poland, Romania, Spain and the UK. These 11 countries account for around 80% of the total population of the 27 EU member states.
The recession in Europe appears to have bottomed out, and the economy in most European countries is beginning to recover from the worst downturn since the second world war. In many countries, the economic data have for the first time returned to a slight upward trend since the first quarter of this year. However, the consequences of the financial and economic crisis have by no means been overcome as yet. Many consumers are still unsettled and are not convinced that the upswing in their respective countries will be sustained. And of course, some countries are still facing a difficult struggle with the financial crisis and its effects – most notably Greece. Uncertainty about how things will progress there, as well as in Ireland and Portugal, is affecting consumers’ confidence in the economic development of their respective countries. The second major issue for Europeans is inflation. For example, Bulgaria is expecting a general price increase of between 5% and 6% up to the end of this year. In particular, the increased cost of basic foods and petrol is worrying European consumers.
Economic expectations: government crisis is unsettling Czech consumers
In almost all of the countries monitored in the survey, the recession appears to have bottomed out. In general, economic expectations have risen in the second quarter, or at least remained steady at the level recorded in March. Many consumers are hopeful that their country can overcome the crisis in the medium term. The sole exceptions are Austria, where the indicator has dropped since the start of the year, and the Czech Republic. Germany continues to be the growth driver in Europe: the indicator currently stands at 50.3 points here.
The indicator has also recorded particularly strong growth in Spain, the UK, France and Poland. Romania has been on a steep upward trend for the past 12 months: the indicator has continuously climbed from its level of -71 points in June 2010 to a current -26.2 points. Despite an anticipated growth level of a pleasing 1.9% for this year, the Czech population has little confidence in the country’s economy at present. This is reflected in consumers’ economic expectations, which reached their lowest level (-48.1 points) since the beginning of 2006, when they first started to be recorded. The principal reasons for this uncertainty are the high national deficit and the development of the global economy. Consumers in the Czech Republic are afraid that the EU rescue packages for Greece, Ireland, Portugal and Spain will push their own country back into an economic slump.
In Austria, the indicator fell by almost 10 points in the second quarter to the present level of 21 points. Ongoing discussions about the European financial crisis and the Greek bailout worth billions are troubling consumers. Like the Czechs, Austrians also fear that their own economy will suffer disproportionately as a result of the payments made to Greece.
Economic expectations in Greece appear to have briefly stabilized, remaining steady in the second quarter, although the level is still extremely low: the indicator now stands at -54.7 points. Nevertheless, the austerity measures being imposed by the Greek government – the condition for receiving the EU aid – mean that Greek citizens face even deeper cuts, and this will have a knock-on effect on the country’s economy. Protesters against the cuts are making their voices heard at the moment. It is now extremely important that the Greek government includes the country’s high earners and economic elite in the savings measures, otherwise the efforts at budgetary consolidation will not be accepted by the population.
Price expectations: British population hopes to see a fall in inflation
In many of the countries monitored in the survey, consumers’ price expectations have passed their peak and dropped in the second quarter. Italy is currently recording the lowest level (-18.4 points). Although the indicator is still very high in France, at 32 points, the situation in the country has eased considerably: in April, the indicator still stood at 49 points. In Austria too, price expectations are at a high level, with 30.6 points, and the indicator has risen in the UK, the Czech Republic and Greece.
In the UK, consumers’ price expectations fell by over 19 points between March (17.3 points) and May (-1.9 points). However, inflation remains at around 4.5%, with the main drivers being rising food and petrol costs. Following the marked price increases in the past few months, consumers are clearly expecting a reversal in the price trend. The British government’s newly introduced package of austerity measures, which will mean that citizens are hit hard by cuts, could also contribute to a lower level of inflation. If consumers have less money in their pockets, retailers cannot pass the rise in commodity prices directly on to their customers. As a result, the upward price spiral is likely to be halted in the medium term.
In Greece, the development in price expectations is inconsistent. From April to May, the indicator dropped by 15.2 points to -17.6 points. In June, however, price expectations rose very strongly again to a current level of 8.7 points. Discussions about tax increases as part of the new package of austerity measures are having an impact here. For example, VAT on various products and services such as food and drink in restaurants has been increased from 11% to 23%, which is directly affecting the day-to-day lives of Greeks. Eating with family or friends in the local bar or enjoying a mocha coffee from the café around the corner is an intrinsic part of life in this Mediterranean country. Consumers are therefore feeling the effects of this tax hike particularly keenly. In addition, tobacco duty is set to increase.
Income expectations: signs of recovery in Spain
Income expectations have also climbed across Europe in the second quarter of 2011. The indicator rose in Germany, Spain, Austria, Romania and Poland, and in some cases the increase was significant. At 44.6 points, Germany continues to record by far the highest value. The indicator has stabilized, albeit at a low level, in Bulgaria and the Czech Republic, whereas in France it dropped to a record low of -41.9 points in June. Only Greeks are more pessimistic in view of their income expectations: the indicator value stood at -58.6 points in June. The drastic measures in connection with the second austerity package, including tax increases, further scrapping of benefits and salary decreases in the public sector, are all having an impact in Greece.
Spaniards believe there will be a gradual economic recovery in Spain and consequently anticipate an improvement in their financial situation. Although unemployment currently still stands above 21%, it has fallen slightly in all economic sectors. This improvement is primarily attributable to tourism and exports. Moreover, the decline in travel to North Africa has benefited Spain and, as a result, there is once again a higher demand for seasonal workers in the tourism industry. Naturally, this has a direct effect on the spending power of seasonal workers. However, the extent to which this decline in unemployment is sustainable and will generate higher incomes in the medium term remains to be seen.
In Poland, the indicator reached an all-time low of -47.5 points in April. It has since increased to a present level of -27.4 points. The Polish economy has been able to recover from the global economic crisis very well and recorded 3.8% growth last year. In the first quarter of 2011, the gross domestic product improved by around 4.5% and Poles hope to benefit from the upswing with salary increases in the coming months. Although unemployment remains rather high at around 13%, a 4.1% increase in employment was recorded in the first quarter of the year, signifying the start of a turnaround.
Willingness to buy: inflation becoming a problem in Bulgaria
The gradually improving economic situation and anticipation of a return to higher incomes are having an effect on the willingness to buy. The trend appears to have bottomed out in most countries and the indicator is either climbing slightly or stabilizing. In this respect, Germany has recorded the highest value of 35.1 points, while Greece stands at the other end of the scale, with -41.8 points, closely followed by the United Kingdom, at -41.5 points.
In Bulgaria, the indicator dropped further in the second quarter, though not as sharply as previously. Since March, it has fallen almost 6 points and currently stands at -3.1 points, which is the lowest value since February 2005. Inflation could potentially become a serious problem in Bulgaria in the medium term. An inflation rate of just under 6% poses a threat to both the country’s political stability and its prospects of a lasting upswing. Given the fact that disposable incomes are already barely covering standard living costs and this is not likely to change in the foreseeable future on account of high inflation rates, consumers do not consider now to be a good time to make any major purchases beyond those that are absolutely necessary. They must first concentrate on consolidating their household budgets.
Following a drop of almost 49 points in Spanish consumers’ willingness to buy in March, the indicator stabilized in the second quarter and currently stands at -16.2 points. The initial agitation following the resolution of a new government austerity package, which includes further tax increases, appears to have abated somewhat. However, only time will tell how incomes will be affected by the slight economic recovery, and only when they begin to rise again will consumers be able to make purchases and consequently boost the upswing.
Following debates on a further raft of austerity measures including tax rises, benefit cuts and increases in various contributions in Greece, willingness to buy here has fallen by 13.7 points to a current level of -41.8 points.