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Europe will Lose More than €70 Billion in Consumption

In: Finance, Forex

European consumers spooked by the war in Ukraine and record inflation are likely to drop out as key drivers of the region’s post-pandemic recovery, dealing a blow to the economy this year.

Based on deteriorating consumer confidence, economists led by Ana Boata see lost private spending in the 19-nation euro area in 2022 adding up to 70 billion euros ($73.6 billion) — the equivalent of about 500 euros per household.

The estimate is based on a May survey of more than 2,500 people in Germany, France and Italy, the region’s three largest economies.

Euro-area private consumption started shrinking at the end of last year and declined by 0.7% in the first quarter amid stubbornly strong price pressures that may still get worse.

The European Central Bank warned this week that 2022 inflation could exceed 7% and committed to a quarter-point increase in interest rates next month — the first in more than a decade — with a bigger hike likely to follow in the fall.

Boata and peers expect consumer spending to decline also in the second and fourth quarters — interrupted only by a brief rebound in hospitality and travel expenses during the summer holiday season.

At the same time, gross savings rates in the three economies covered in the survey will fall back to pre-pandemic long-term averages by the end of the year, they said.

Partially responsible are higher food and energy costs. Households’ bills for the former will climb an average of 550 euros this year, expenditures for the latter are set to rise by more than 750 euros, according to the report.

While excess savings in the euro area amount to more than 380 billion euros, they’re unevenly distributed across income groups, the economists wrote, with the weakest households looking at a buffer of just 93 euros.

Hence, for almost two-thirds of households, excess savings will be insufficient to shield them from the inflation hurricane this year.

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