Tags: EU | Europe | Economy

Europe's Sluggish Recovery Hinges on Consumers

Thursday, 12 August 2010 11:37 AM

As Europe makes a wobbly recovery based largely on selling goods overseas, the key question for its economy is: Are shoppers at home ready to start spending again?

Growth in the 16 countries that share the euro was just 0.2 percent in the first quarter, and analysts say the recovery can only really take root if consumers in France, Germany and elsewhere forget their fears of unemployment and more turmoil — and open their pocketbooks.

Second quarter data to be released Friday are widely expected to show a modest acceleration, thanks to strong export-led growth in Europe's economic engine Germany. The figures will show eurozone growth rebounded to 0.8 percent quarter-on-quarter in the April to June period, estimates Jonathan Loynes, chief European economist at Capital Economics.

While the second quarter is expected to be strong, forecasts dwindle for the second part of the year. Can consumers help Europe continue its modest bounceback from the recession and a government debt crisis that saw Greece saved from bankruptcy by an international bailout in May?

Indicators are giving uncertain readings of consumer willingness to spend, leaving the recovery on a knife edge.

Overall retail spending in the eurozone was flat in June after rising slightly in May, according to EU statistics office Eurostat. France was among the worst performers, falling 1.3 percent compared to the previous month. This can partly be blamed on a shift of France's traditional summer sales period to July from June.

French shoppers' penchant for spending freely on the country's fine foods and fashions has long been the motor of economic growth in France, much more so than in neighboring Germany, where global trade and exports power the economy.

Jean-Claude Amer, shopping at the BHV department store in central Paris, is ready to do his part.

"Spending money is what I do," said Amer as he walked out of the store into the trendy Marais neighborhood.

The 63-year-old retiree said the crisis has not put a crimp in his spending ways. "Not at all. I love to buy tech gadgets. I just bought some home electronics," Amer said.

Spending in large retail chains, such as Carrefour, Casino or Monoprix, has risen in the first half of the year according to an upcoming report by retail consulting firm Symphony IRI.

"Shoppers have what we call 'frugal fatigue,'" said Jacques Dupre, an analyst at Symphony IRI and the report's author. After months of cutting back and substituting generic or lower priced products, shoppers are starting to fill their carts with more expensive name-brand options once again.

The researcher forecasts growth of between 1 and 1.5 percent in retail spending at supermarket chains in the second half, after 1.2 percent in the first six months of this year.

"But people are very reactive to shocks — if in October there are new rounds of layoffs or higher unemployment, it could quickly go much lower,"Dupre said. "So the recovery is real but relatively fragile."

Another BHV shopper, Oliver Penin, says the economy will have to improve without any extra help from him.

"I'm not changing my habits one iota," Penin said. The 55-year-old engineer had just picked up a few small plumbing supplies to fix his sink."Crisis or no crisis, I spend my money the same way."

Penin's attitude is reflected in the latest figures from France's national statistics agency. In June French consumer spending on manufactured goods slumped 1.4 percent, reversing the slight 0.6 percent gain posted in May.

Sales of furniture and consumer electronics fell sharply in June, the INSEE statistics agency said.

French unemployment in the first quarter was stable at 9.5 percent. In Germany, unemployment hit 7.6 percent in July.

That could be one reason German consumer confidence has been looking brighter recently amid expectations that an accelerating economic recovery will keep unemployment in check.

The GfK institute's confidence index, a closely watched yardstick, this month reached its highest level since November 2009, and found that Germans' propensity to buy remains well above the long-term average. The recovery and relatively low unemployment have boosted people's income expectations.

Thanks to low inflation and other factors, "I expect the shopping mood and consumption to increase further in the course of this year and contribute to overall economic development," Economy Minister Rainer Bruederle said recently.

Actual retail sales, long a weak point of Germany's economy, have shown some improvements this year, albeit patchy ones. Sales were up 3.1 percent in year-on-year terms in June, the last month for which figures were available, but down 0.9 percent compared with May. There were strong year-on-year rises in sales of textiles, clothing and shoes — up 8.2 percent — and in sales of household appliances and construction material — up 7.3 percent.

Still, over the first half of the year, overall retail sales were actually down 0.4 percent compared with January-June 2009.

German retail group Metro AG has said its second-quarter revenue rose 2.4 percent compared with a year earlier in part because the football World Cup helped sales of TVs at its Media Markt and Saturn chains — which saw revenue rise 9.3 percent.

The company's CEO lines up with the optimists:

"Even if the crisis is not over yet, we see clear silver linings on the horizon in an increasing number of countries," CEO Eckhard Cordes said last week. "We are focusing more on growth and expansion again — the period of caution is over."

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As Europe makes a wobbly recovery based largely on selling goods overseas, the key question for its economy is: Are shoppers at home ready to start spending again?Growth in the 16 countries that share the euro was just 0.2 percent in the first quarter, and analysts say the...
Thursday, 12 August 2010 11:37 AM
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