Consumer sentiment dampened by inflation and the war in Ukraine

The mood among consumers has become gloomier around the world. High levels of inflation are eroding purchasing power. In Europe, uncertainty about the reliability of Russian gas supplies is the biggest drag on economic growth. On the labour market front, the US is in better shape than Europe.

It is hardly surprising that the impact of the war in Ukraine, slowing economic growth, persistent inflation and tightening monetary policy have started to take their toll on consumers’ inclination to spend. And since these adverse factors are global in nature, sentiment is deteriorating all over the world. However, consumer sentiment often paints a gloomier picture than the actual data. The US is faring better than the eurozone, including with regard to the labour market.

US consumers’ willingness to spend is being weakened by inflation but is not expected to collapse

Persistent inflation, and the loss of purchasing power that it brings, is clearly putting a damper on the mood in private households across the US. In June, US consumer prices were up by 9.1 per cent year on year, the highest increase in more than 40 years. But the US labour market remains very robust and households can still draw on savings accumulated during the pandemic. Combined with healthy wage growth, these factors are helping to prevent weaker consumer sentiment from translating into an actual decline in consumer spending. Union Investment expects that the currently very overheated US labour market will cool down somewhat in the coming months. This is the outcome that the US Federal Reserve (Fed) is hoping to achieve in its battle against inflation, as high pay settlements are considered a key source of inflationary pressure. But there are no indications that the US labour market will deteriorate considerably beyond that in the foreseeable future. As long as US unemployment figures do not start to rise significantly, consumer spending – a crucial driver of economic growth – should remain supported. Consumption may thus slow down noticeably, but it is not expected to collapse.

Although inflation means that US consumers are getting less for their money in real terms, they are continuing to spend. The biggest threat to economic momentum (and consumer spending) in the US is that monetary policy could choke off growth if the Fed goes too far with its cycle of interest-rate hikes. But at its last meeting, the Fed emphasised that its interest-rate decisions in the coming months would be more dependent on economic data at the time. This seems to confirm Union Investment’s assessment that the Fed can succeed in bringing inflation under control without tightening monetary policy too far. Union Investment expects that the Fed will conclude its cycle of interest-rate increases by the end of the year at a target range of 3.25 per cent to 3.5 per cent, with no further raises to follow in 2023. This would pave the way for generally stable labour market conditions and a constructive consumer spending environment in the US.

Gloomy outlook for economic growth

Consumer sentiment survey

Consumer sentiment survey
Source: Refinitiv, as at 1 August 2022. * GFK **University of Michigan

Leading indicators for the eurozone are plunging

Consumer sentiment in the eurozone has turned significantly bleaker since March, reaching a new record low of minus 27 points in July. However, the eurozone’s labour market is also relatively tight at present as many service sector companies are reporting shortages of labour. In spite of the deterioration in sentiment indicators, actual consumer spending has thus remained fairly robust in the eurozone too, helped by lingering catch-up effects in connection with the post-pandemic reopening of the economy. At present, consumers are still spending plenty on services and travel. But this is likely to abate over the coming quarters, not least because the savings accumulated by households during the pandemic will gradually run out.

Reliance on Russian gas supplies slows growth in Germany

The German Federal Statistical Office’s press release on gross domestic product (GDP) for the second quarter of 2022 also suggests that growth was once again shored up by consumer spending. Overall, GDP stood at close to zero in the second quarter and the results for the first quarter were revised significantly upwards. But it would be prudent not to read too much into this because everything points towards a cool-down in the second half of the year. The appetite for spending is likely to wane considerably as people are faced with sky-rocketing gas and electricity bills in the wake of the energy crisis. Germany is affected particularly severely in this respect as it is highly dependent on Russian energy supplies. The threat of gas rationing and rising interest rates are further dampening consumer sentiment and could eventually start to weigh on actual spending. Union Investment believes that the labour market in Germany will follow the US example and remain firm, which should support consumer spending, but the outlook for the eurozone on this front is anything but rosy.


As at 1 August 2022.

More capital market news