Euro Zone Consumer Spending Outlook Grim As Unemployment Hits Record, Inflation Rises

By Moran Zhang | October 31 2012 12:30 PM

Over the past week, the European Union's statistical office has delivered a string of statistics that don't bode well for consumer spending in the latter part of 2012. A sharp rise in the region’s unemployment rate, coupled with the high level of inflation, became the latest evidence of the damage the single currency bloc’s long-running fiscal crisis is doing to the real economy, as governments cut spending to try to control their debts.

REUTERS

Greek leaders say that demands made by the three big institutions that decide whether the nation gets bailout money are "unacceptable."

Sponsorship Link

"High and rising unemployment, and relatively sticky inflation, does not bode well for consumer spending across the euro zone, especially as consumers in many countries are also facing muted wage growth and tighter fiscal policy," said Howard Archer, chief European economist at IHS Global Insight, in a note.

Unemployment in the 17-country euro zone hit a record high of 11.6 percent in September, official figures showed Wednesday, up from an upwardly revised 11.5 percent in August. In total, 18.49 million people were out of work in the region last month, up 146,000 on the previous month, the biggest increase in three months.

Five countries in the euro zone are already in recession — Greece, Spain, Italy, Portugal and Cyprus — and others are expected to join them soon. The region as a whole is expected to be confirmed to be in recession when the first estimate of euro zone economic activity in the third quarter is published mid-November.

While the September unemployment data underscored the gulf between stronger and weaker nations within the euro zone, there are signs of worsening conditions in some of the so-called "core" economies.

Wednesday's data showed French unemployment rose to 10.8 percent last month, compared with 10.7 percent in August and 9.6 percent in September 2011.

Moreover, recent falls in French consumer spending are a blow to the economy, which has been heavily reliant on households for growth in the past.

While French consumer spending rose by 0.1 percent in September, this only offset a fraction of the previous month’s 0.8 percent decline and left the annual growth rate in negative territory.

This suggests that consumer spending in the national accounts probably fell in the third quarter, following the second-quarter’s 0.2 percent decline, confirming that the sector is no longer providing the strong support to the overall economy that it has in the past.

“With unemployment near a record high, banks cutting back their lending and fiscal austerity set to hit households soon, the consumer outlook appears bleak,” said Jennifer McKeown, a senior European economist at Capital Economics, in a note. “Unfortunately, the situation seems very unlikely to improve for some time.”

Wage growth has remained subdued, at about 2 percent, and a slowdown seems very likely. With inflation hovering around 2.5 percent for the past year, real disposable incomes have already fallen in three of the past five quarters, causing the annual growth rate to turn negative for only the second time on record.

“We suspect that further falls in consumer spending will see France head into recession before long,” McKeown said.

Separately, the European Commission said Tuesday confidence among consumers and businesses in the euro zone continued to deteriorate in October to the lowest levels in around three years. This report suggests that the economy started the fourth quarter on a very weak note.

The European Central Bank's Governing Council next meets Nov. 8 to make decisions on policies including its key interest rate, which is currently a record-low 0.75 percent.

“With the further, appreciable rise in unemployment in September highlighting that the euro zone faces a difficult fourth quarter and beyond after almost certainly suffering further GDP contraction in the third quarter, and with the underlying inflation situation in the euro zone still looking far from alarming, we believe that the ECB will ultimately take interest rates down from 0.75 percent to 0.50 percent,” Archer said.