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Eurozone consumers defy gloom

By Ralph Atkins in Frankfurt and Ben Hall in Paris

Published: March 26 2009 17:30 | Last updated: March 26 2009 17:30

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Paris restaurants still bustle, even if it is perhaps easier now to get a table. German high streets remain crowded, although window-shopping was always a national ­pastime.

The relative resilience of consumer spending across much of continental Europe is a striking feature of the recession, the worst since the second world war. While gauges of eurozone manufacturing activity, such as purchasing managers’ indices, have fallen precipitously a result of collapsing export demand, the woe seems to be weighing less heavily on consumers in the 16-country region.

Germany’s GfK research institute said on Thursday its consumer confidence index, which has held steady in recent months, would dip only slightly in April. Given the economic turmoil, the mood remained “robust”, it said. In France, the Insee statistics office reported French consumer confidence was stable in March, albeit at a low level. In its otherwise gloomy outlook, which sees the French economy contracting by 2.9 per cent in the first half of this year, Insee expects household consumption to rise by 0.2 per cent in the first three months of this year and by 0.1 per cent in the second quarter.

As the eurozone recession broadens, however, economists warn that consumer spending could take a turn for the worse, deepening the recession. Even with fiscal stimulus packages in the pipeline, hopes that German or French consumers will make up for the shortfall in demand created by their retrenching UK and US counterparts, are likely to be dashed. “Don’t expect too much from the Germans,” says Jörg Krämer, chief economist at Commerzbank in Frankfurt. With unemployment rising, he adds, “it is not rational” to spend aggressively.

European saving and spending chart

Although overextended households in Spain and Ireland have been hit by the effects of collapsing housing markets, it was always unlikely that eurozone consumer spending would drop as dramatically as industrial production. Many eurozone households were already saving a relatively high proportion of their incomes before the recession began to bite. “Whereas UK consumers had been quite profligate, euro area households have in general been much more cautious, implying that any retrenchment will be much less pronounced,” says Colin Ellis, European economist at Daiwa Securities SMBC in London. More important for eurozone growth have been developments in global demand, he says. “Trade is really doing a lot more of the damage than in either the UK or US.”

Steep falls in eurozone inflation should support consumer spending. “Froopp” inflation – which measures the rate at which prices are rising for “frequent, out-of-pocket purchases,” the cost of which is noticed most by consumers – has decelerated much faster than overall inflation. The relative rigidity of the large eurozone economies – previously seen as a sign of weakness – means wages are unlikely to fall and in some cases could rise significantly in real terms this year.

But eurozone consumer spending will increasingly be hit by lengthening jobless queues. Spain has already seen sharp rises in jobless numbers and the longer the recession lasts, the less effective will be measures put in place to slow rises in unemployment in France and Germany. Fear is also likely to play a large role when it comes to consumer spending. The European Commission reports consumers have never been gloomier about job prospects in the next 12 months since it started compiling such surveys in 1985.

Fiscal packages will not offer much relief. Berlin’s efforts have been focused largely on infrastructure plans. Nicolas Sarkozy, the French president, has so far refused to expand a limited discretionary fiscal stimulus on the basis that consumer spending is still growing. How long such optimism will last is unclear.

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