Global Daily – More severe lockdowns signal big consumption dip

Euro Macro: Consumers worried about the labour market and set to save more – Germany has moved to the strictest forms of lockdown since the start of the pandemic and now has also instructed all non-essential shops to close, whereas in March-April these were allowed to remain open. Moreover, schools will have to close again. The Netherlands has decided to impose similar lockdown measures, which also are stricter than the ones that were taken during the first wave of the virus. The measures will remain active until well into January. In the other big eurozone countries the measures that were taken in early November still are largely in place, with the exception of France where non-essential shops were allowed to reopen end-November after they had been closed for about one month. We think the new lockdown measures will further weigh on consumer spending in Q4, which is in line with our below-consensus forecast for the contraction of GDP in Q4 of 3.8% qoq (also see here).

The impact on private consumption of the new lockdowns will probably be significant. Still, we expect consumption to decline more modestly than in Q1-Q2 of this year, when it dropped by more than 16% in total (we have pencilled in a contraction by around 5% in Q4). To begin with, online spending has risen sharply since the start of the year and has substituted a part of sales in stores, implying that shop closures have a more moderate impact. Indeed, internet sales in the eurozone as a whole were up by 28% year-on-year in October, versus a rise in total retail sales of around 4%. Also, parts of services consumption has remained depressed since the start of the pandemic due to social distancing, for instance spending on leisure and tourism and big sports and cultural events. Therefore, the starting point is at a lower level this time, which means that the decline during the lockdown will be more moderate. Having said that, worries about deteriorating labour market conditions and future income growth will probably have a negative impact on consumption again, as they will raise consumers’ precautionary savings.

An early indication for the changes in consumption in Q4 was given by changes in consumer confidence in October and November, when new lockdown measures were announced in most countries. Confidence fell by almost 4 points in total, to -17.6, which is well below the long-term average value but still significantly higher than during the first lockdowns, when it reached a trough of -22 in April. The details of confidence show that consumers became more worried about future labour market conditions again. The index measuring expectations about future unemployment rose by more than 24 points in October and November, ending up not a lot below its peak level of April. Another indication for consumption being hit not only by shop closures but also by consumers raising precautionary savings was the assessment of the consumers’ propensity to spend both now and in the next 12 months. As the graph above shows, these both declined in October and November. We expect further deterioration in consumer confidence and its main components in December.