Eurozone – How consumers will shape the recovery
The full research briefing is available below (PDF format). Media may reproduce our charts with attribution to Oxford Economics.
Key points:
• The response of Europe’s consumers to the end of the lockdowns will shape the recovery, for better or worse. Social distancing, constrained spending options, and precautionary savings pushed the household saving rate in the eurozone to a peak of 25% in Q2 2020 – twice the pre-crisis level. By mid-2021, excess savings may amount to 6% of GDP.
• But a normalisation of household saving rates is a prerequisite for a vigorous rebound in consumer spending. In our baseline, saving patterns gradually return to pre-crisis levels by 2024. Should the release of pent-up demand postlockdown accelerate, it could push GDP up to 4% above our baseline in 2022.
• Consumption gains in H2 drive around half of the 4% GDP growth we forecast for 2021 in our baseline, mostly due to reduced saving ratios. But plausible upside scenarios could see a more front-loaded fall in saving rates, adding between 0.8% and 1.7% to 2021 GDP. Longer lockdowns or consumer caution could represent a 0.6% drag.
• We see a consumption spree on the back of reduced savings rates as a transitory demand shock. Thus, we expect the rise in inflation toward 2% – or even higher in our strong upside scenario – to be temporary as well. But a spending spree won’t offset the long-term headwinds to aggregate demand and the disinflationary pressure stemming from secular stagnation in the eurozone.
• Considering the ECB’s forward guidance, we think the central bank will look through the price spikes and keep policy rates on hold, although a period of above-target inflation could mark an early end for the PEPP. While stronger macro fundamentals and an early end to PEPP could lift German Bund yields significantly during 2022, structural headwinds will put a lid on any policy shift.
