Europeans are also not spending money anymore

As consumer spending in the United States shows signs of weakness, European household consumption is also facing difficulties.

On Tuesday, December 3rd, HSBC senior economist Chris Hare released a research report indicating that the consumption patterns of European households are entering a new phase: while real income has significantly increased, household spending has barely rebounded, and the savings rate remains flat at a high level.

Hare further stated that the year-on-year growth rate of real income for residents in the Eurozone and the UK has already exceeded 3%, but the growth rate of household spending is nearly zero. This is mainly likely due to three factors: first, the high interest rate environment; second, a decrease in household wealth; and third, low consumer confidence.

Looking ahead, HSBC expects that the savings rate of European households will stabilize soon, and by 2025 and 2026, household consumption will return to a growth pace in line with income, with a year-on-year growth rate slightly exceeding 1%.

The "Thrift" Trend Among Europeans is Intensifying

HSBC's report states that the phenomenon of "continental thrift" in Europe emerged after the end of the COVID-19 pandemic, during which European households had significantly higher savings rates compared to American households, which had relatively lower savings rates.

Currently, this phenomenon has not eased but has intensified, as household spending growth remains flat or even slows down despite the increase in income and steady cooling of inflation among European residents, particularly evident in the UK.

In other words, the savings rate of European households is even higher than pre-pandemic levels, reflecting a very cautious consumption mindset. Data from the report shows that the "excess" savings stock in Europe has further increased, while this figure is nearly zero in the United States.

The report indicates that the phenomenon of European households controlling spending poses significant economic risks—for every 1 percentage point increase in the savings rate in the Eurozone, GDP will decline by more than 0.5%, and inflation will decrease by about 0.2 percentage points, and vice versa.

This means that the shift in European household consumption patterns could have a significant impact on the monetary policy outlook for the Euro.

Three Major Reasons for Weak European Household Consumption

Using econometric models, HSBC believes that "continental thrift" in Europe mainly stems from: high interest rates, decreased household wealth, and low confidence.

In terms of interest rates, we estimate that the interest rate hikes since the end of 2021 have increased the savings rate of European households by 2 percentage points;

Regarding the wealth effect, the decrease in household wealth may raise the savings rate in the Eurozone by 1 percentage point, with a 2 percentage point impact on the UK;

In terms of consumer confidence, since mid-last year, the confidence effect has slowed the growth of European household consumption by about 1 percentage point

Specifically, while high interest rates have increased net interest income from household investments, families often do not spend much after receiving interest income; on the other hand, families with higher mortgage loan expenses due to rising interest rates tend to significantly cut back on spending. Therefore, the "cash flow" effect of mortgages has both reduced consumption and increased the savings rate.

The report predicts that this "cash flow" effect is beginning to ease, and it is expected that the "shock" of mortgage burdens on household spending will roughly turn neutral next year.

Regarding the decrease in household wealth, the report states that this is mainly due to the decline in bond prices following rising interest rates, which has led to a decrease in the valuation of defined benefit (DB) pensions; however, the report predicts that this will not have a significant negative impact on actual consumption.

In terms of consumer confidence, the report indicates that consumer confidence surveys conducted this year have not fully recovered to normal levels, reflecting a continued cautious attitude.

The weakness in confidence mainly stems from two aspects. HSBC believes that one is the "trauma" effect on European households caused by energy shortages, leading families to seek greater savings buffers to prevent potential fluctuations in energy prices; the second is the political uncertainty faced by the European region from Germany, France, and the UK, as well as uncertainty regarding the prospects of the next U.S. government.

Expected savings rate to stabilize soon, household consumption will not become more cautious

Looking ahead, HSBC expects that the European Central Bank and the Bank of England will significantly cut interest rates in the coming year, which will help suppress the savings rate, alleviate repayment pressure, and simultaneously drive the growth of asset prices and financial wealth, while consumer confidence will depend more on external factors.

Therefore, the report predicts that the savings rate will stabilize soon, and as household consumption growth aligns roughly with income, the "frugality" trend will not continue to intensify.

The report adds that this does not mean there will be a consumption boom ahead, as income growth is expected to slow to around 1%.