As signs of weakening consumer activity emerge in the United States, European households are also grappling with spending challenges.
On December 3, HSBC senior economist Chris Hare released a report highlighting that European household consumption is entering a new phase. Despite significant growth in real incomes, household spending remains stagnant, with savings rates staying consistently high.
Household Spending Stalls Despite Rising Incomes
Hare noted that real income growth for residents in the Eurozone and the UK has surpassed 3% year-on-year. However, household spending growth has been nearly flat, influenced primarily by three factors: high interest rates, reduced household wealth, and subdued consumer confidence.
Looking ahead, HSBC forecasts that household savings rates in Europe will stabilize soon, with consumption growth aligning with income growth by 2025 and 2026. Household spending is expected to rise modestly by just over 1% annually.
Rising Thrift Among Europeans
The report identifies a growing trend of "continental thrift," a phenomenon that began post-COVID-19. While American households experienced relatively low savings rates during this period, European households maintained significantly higher rates.
This cautious approach has only intensified. Even as incomes grow and inflation cools, household spending remains flat or even slows further, particularly in the UK.
Current data shows that European savings rates have surpassed pre-pandemic levels, reflecting a heightened sense of financial prudence. Excess savings in Europe continue to increase, while in the U.S., such savings have largely dissipated.
The report warns that this trend poses considerable economic risks. For every 1% rise in Eurozone savings rates, GDP declines by more than 0.5%, while inflation decreases by approximately 0.2%. Conversely, a reduction in savings rates would yield the opposite effects. This underscores the significant impact of European households' shifting consumption patterns on the region's monetary policy outlook.
Three Key Drivers Behind Weak Consumption
Using econometric models, HSBC attributes the "continental thrift" to three main factors: high interest rates, declining household wealth, and weak consumer confidence.
1. High Interest Rates:
Since late 2021, rate hikes have driven European household savings rates up by approximately 2 percentage points. While higher interest rates have boosted net interest income for some households, this extra income has not translated into increased spending. On the contrary, households facing higher mortgage costs have substantially cut back on expenses, contributing to higher savings.
HSBC expects the "cash flow" effect of mortgages to neutralize by next year, alleviating some of the financial strain on household spending.
2. Declining Household Wealth:
Rising interest rates have lowered bond prices, which in turn has reduced the valuation of defined-benefit (DB) pension plans. While this has contributed to higher savings, the report predicts the overall negative impact on real consumption to be relatively limited.
3. Weak Consumer Confidence:
Consumer confidence surveys this year reveal that sentiment has not fully returned to normal levels, reflecting ongoing caution among households.
HSBC identifies two primary causes of this weak confidence:
- The "trauma" of energy shortages, which has led households to build greater savings buffers to guard against potential future price fluctuations.
- Political uncertainties stemming from Germany, France, and the UK, alongside concerns about the outcome of the next U.S. presidential election.
Savings Rates to Stabilize, Cautious Spending to Ease
Looking ahead, HSBC anticipates that significant rate cuts by the European Central Bank (ECB) and the Bank of England (BoE) in the coming year will help curb savings rates, reduce debt burdens, and boost asset prices and financial wealth. Consumer confidence, however, will depend largely on external factors.
The report forecasts that savings rates will stabilize soon. As household spending growth begins to align with income growth, the trend of heightened thriftiness is unlikely to worsen.
However, this does not imply a spending boom on the horizon. HSBC expects income growth to slow to around 1%, tempering the potential for a strong resurgence in consumer activity.
