European consumer spending is set to gradually recover over the next 12 months, as inflation eases and interest rates fall, a new report from Moody’s has found.
The ratings agency’s latest State of the Consumer – Europe report notes that lower inflation is set to lead to a gradual increase in real income, ‘easing some of the strain on households.’
Moody’s expects that tight monetary policy is set to keep headline inflation on a downward path, towards Central Bank targets, while major European equity indexes have edged higher and EU house prices ‘show signs of stabilising’.
Elsewhere, labour market conditions are set to remain ‘tight’ in most European markets, underpinning consumer sentiment. As of April 2024, euro area unemployment fell to a record low, and while this is expected to rise slightly, it will still remain below average for the rest of the year.
‘Worst May Be Over’
These factors are likely to lead consumer sentiment in the EU and UK to recover to their long-term averages, suggesting that the ‘worst may be over’ for consumers in the region.
‘We expect easing inflation, lower rates and tight labour markets will lead to a gradual recovery in sentiment in the second half of 2024,’ Moody’s noted.
‘However, the pace of recovery remains slow because consumers are still cautious about their situation and geopolitical uncertainties persist. The recent announcement of a snap election in France has added further uncertainty to the recovery trajectory of French consumer confidence.’
Consumer Products
Even as spending recovers, consumers are likely to be ‘highly selective’ when it comes to their purchasing habits, making price rises harder to implement for consumer product firms.
Moody’s expects average operating profit growth in the global consumer product sector to rise between 3% and 5% over the next 12 to 18 months.
In terms of the companies that Moody’s rates in this sector, the outlook is largely stable, tilting slightly towards negative in the consumer durables segment.
‘As cash strapped consumers hunt for deals and focus on essentials, subsectors such as discount and value stores will get an earnings boost,’ it added.
