Confidence in Europe Crumbles

The table focuses on German consumer confidence from GfK, but it also includes the most up-to-date metrics for Italy, France, and the United Kingdom. For all these countries, consumer confidence is extremely low. In the case of the German GfK measure, for which there's an advance estimate for August, the value of -30.6 is the lowest in the history of this survey. For France, the consumer confidence index at 79.5 has been lower less than 1% of the time. In the U.K., that consumer confidence measure for July has been that weak or weaker less than 1/2 of one percent of the time. In Italy, consumer confidence has been weaker 18% of the time. All of these are extremely low values for consumer confidence.

As inflation has risen globally, consumer confidence has fallen. This has created some confusion about economic performance as there also is concern about economic slowing and the potential for recession. However, what we see shows clearly that economic performance can still be pretty good even if inflation performance is very bad; and yet consumer confidence can register a very low reading in such circumstances. Perhaps the best example of this is in the United States where the unemployment rate remains near 40-year lows and where consumer spending continues to plow ahead and yet with extremely high inflation the U.S. consumer sentiment index, as measured by the University of Michigan survey, is near its historic low. Despite these conditions of low and falling unemployment and advancing consumer spending, many in the U.S. think the economy is in recession. It's confusing…

It's not possible to look at a consumer confidence number and to really know why consumers are feeling as bad as they are. Even the surveys that give detailed readings on the consumer that may allow you to extract certain elements that are particularly bad, it's always hard to know exactly what it is that is nagging at consumer expectations the most and causing the loss of confidence.

In the German survey, there are three components that are available with a one-month lag. These components refer to the reading of -27.7 for July rather than the -30.6 reading for August. However, both are quite weak numbers, and the component values ought to be relevant for what's happening in August even though these are, formally, numbers from July.

In July, economic expectations in Germany fell to a reading of -18.2 from June's -11.7. The economic index has been lower than that reading less than 10% of the time, historically. Income expectations in July fell to a -45.7 reading from June's -33.5. The income expectation rating is the lowest on record. The propensity to buy slipped to a reading of -14.5 in July from -13.7 in June; at that level, the propensity to buy has been weaker historically about 18% of the time.

There are concerns about growth in Europe and there is the reality of inflation that is raging and ravaging consumer incomes. The ECB and the Bank of England both are raising interest rates to try to combat the high inflation that is being faced in Europe and in the U.K. Consumers are worried about the future and there are nagging events that continue to occur that threaten economic prosperity. The COVID virus continues to circulate in some form, COVID continues to impact supply lines, and the war that Russia has waged against Ukraine presses on continuing to threaten energy supplies to Europe as well as to disrupt other supply lines and to keep political instability front and center as a concern.

This is a complicated economic environment. Europe has a special problem of being dependent on energy shipments from Russia, something the United States had tried to wean Europe off for a number of years unsuccessfully; now Europe is paying a very steep price. Europe was hard-headed and unwilling to see that Russia was not really a country that it could do business with... safely. But that's what Europeans thought; it's particularly what Germany thought with Angela Merkel at the head. Germany had pursued a lot of commerce with Russia as well and had allowed itself to grow dependent on its energy from Russia. That fostered a false sense of security both for Germany and for Russia. Co-dependence is not security.

Now, with rising inflation, Europe has the added problem that it fears an energy shortage that could further crimp its economic growth and that has caused the European Central Bank to be wary about moving too strongly to bring inflation under control. It's concerned about growth being undermined by an energy shortage.

It's hard to imagine Europe in a trickier situation that it's in. But that's real. Global inflation is real. High oil prices are real. The threat to global growth is real. Covid is real. And all these threats are playing out in the global marketplace at the same time. It's no wonder that consumers are feeling as bad as they feel. And it's hard to disentangle the effects of what they're most concerned about whether it's inflation, whether it's the potential for recession or whether it's their jobs or whether it's fear of WWIII, or something else. There are no shortages of candidates for consumers to be concerned about.