Executive Summary
One year on since Russia’s invasion of Ukraine, retail sales in Europe have proven more resilient than expected despite record-high inflation and poor consumer confidence. Income growth has (partially) cushioned the inflation shock. In particular, strong gains in labor income, mostly from strong job creation in France and higher wages in Germany, Italy and Spain, have supported household purchasing power. Overall, accumulated pandemic savings have had a secondary effect to support consumption spending, and credit only contributed significantly in France and Italy. However, consumption is only likely to pick up steam after the second half of 2024.
The purchase paradox: Unlike in past economic downturns, spending on non-durable goods (predominantly food, but also electricity and car fuel) has fallen the most (from -2% in Italy up to -7% in Germany). Conversely, bigger ticket items such as durables (cars, consumer electronics, furniture, appliances) or semi-durables (clothing, toys, cultural goods) have generally continued to grow by a low single digit despite the surge in the cost of living, and services including air transport (+42% y/y), food service (+13% y/y) and accommodation (+30% y/y) are thriving.
One possible explanation is the asymmetric nature of the inflation shock on households. Because they are most exposed to items seeing the fastest increase in costs such as food and shelter, the lowest-earning households have no choice but to cut back on essentials, while more well off households can maintain discretionary spending. Our calculations show that in H1 2023 the average household spent an extra +EUR132 for the same basket of goods and services in Spain, +EUR244 in France, +EUR301 in Italy and +EUR290 in Germany, compared to H1 2022.
Lower growth, higher interest rates and tighter funding put fashion, department stores and e-commerce specialists most at risk. As the positive impact of legacy Covid-19 support schemes fades away, consumption slows down and credit becomes more scarce, large insolvencies are making a comeback with 16 cases in 2022 for a total turnover at stake superior to EUR5bn. Already in Q1 2023, the pace of the deterioration accelerated further, with 11 cases totalling EUR2.4bn at play, paving the way for a return to levels last seen in 2019 should the trend continue through the year.