Personal debt holding back consumption growth

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Consumer spending by households fell in the third quarter of 2013 to levels last seen in mid-2004. Fixed household costs have risen by 12% since 2008 and are acting as a brake on people’s free disposable income. Economic recovery depends partly on the repayment of personal debt.

ABN AMRO believes that consumer spending by households has fallen because real disposable income dropped by around 6% between 2008 and 2013 Mathijs Deguelle Mathijs Deguelle Sector Economist

Lower household spending due to reduced spending power

Household consumer spending in the Netherlands has been pretty flat for several years now. Between 2000 and 2013 it is estimated that the cumulative growth in consumer spending was just 4.25%. That’s substantially less than the 10.5% for the euro area as a whole. And since mid-2008, Dutch household consumer spending has actually fallen, as can also be seen from the sharp decline in retail sales during that period. ABN AMRO believes that consumer spending by households has fallen because real disposable income dropped by around 6% between 2008 and 2013. The reasons for that were low pay increases, government austerity measures and pension changes. In the third quarter of 2013, spending actually fell to a level not seen since mid-2004.

Rise in fixed costs limits ‘free’ spending

At the same time as disposable income has fallen, fixed household costs have risen sharply, by an estimated 12% since 2008. This squeezes other (free) household spending, and that is most visible in spending on discretionary goods such as clothing, consumer electronics and home furnishings. Although ABN AMRO believes that disposable income will rise slightly in 2014, high fixed costs mean that free household disposable income will not increase. As many households first want to improve their financial position, ABN AMRO believes it will be 2015 before there will be scope for a budding recovery in household spending. Even so, that recovery is projected to be very modest, at just 0.3%. There is also scope for an increase in retail sales volumes in 2015, but as with household spending, ABN AMRO believes this will be modest, at around 0.5%.

Paying off personal debts the key to recovery in consumption

More and more Dutch households are looking to repay some of their debt in order to balance their books. They are therefore using their already scarce funds to pay down their debt, leaving even less scope for discretionary spending. ABN AMRO sees the personal debt burden as the biggest obstacle to growth in consumption.

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