German consumer confidence has fallen to its lowest level ever, it became clear last week. Never before have German consumers been so negative about the economy and their financial prospects. And Germany is not alone.
Far from it. In the United States, the United Kingdom and the Netherlands too, consumer confidence recently reached an all-time low. The extremely negative sentiment among consumers is a global phenomenon caused by another global phenomenon: extremely high inflation.
It’s not so bad, is it?
Still, there are frequent comments that consumer spending is not really suffering from the negative sentiment. But I do not believe this is true. There are three reasons why I think so:
First, looking at the most recent spending figures, the turn seems to have begun. For instance, US retail sales fell by 0.3 per cent in May, the most recent figure. Other countries also saw declines.
Second, many spending figures are nominal. No correction has been made for the sky-high inflation that artificially pushes up nominal figures. If we look at real figures, the picture is already much less rosy. Over the past 12 months, real retail sales in both the Eurozone and the United States have failed to grow or have even declined slightly. And since it is real retail sales that matter for real GDP growth, there is virtually no growth contribution from consumers.
Third, the reasonable growth in nominal retail sales in the previous months is explained by two factors: 1) a decrease in savings and 2) an increase in credit-card debt.
Savings not a panacea
Both developments are not sustainable in the longer term. When savings run out, so does spending. I am also not a big fan of the idea that excess savings - the savings left over from the Covid-19 era - will keep spending up. Lower-income households have simply run out of savings due to extremely high inflation. And since you can’t expect high-income households to suddenly eat twice as much or buy twice as much clothing, the skew in savings is a reason not to expect miracles.
Recession risk
Even though the relationship between consumer confidence and consumer spending is not strong in the very short term, when sentiment drops sharply over a longer period, the likelihood of a sudden spending freeze increases. I do not rule out that we will see this happen sometime in the coming months or quarters. In most cases, the recession is then immediately there. This scenario is not fully priced into equity markets or other risky investments.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on Investment Officer Luxembourg.
This article originally appeared in Dutch on InvestmentOfficer.nl