Nice theory – shame about the surge in the cost of fuel, food and other things people buy before they see what is left to save or spend on life’s luxuries, their discretionary budget.
A vendor at Paris’s Bastille market provided a striking example of one luxury moving further out of reach of shoppers a few weeks ago when he raised the price for specialty Bresse chickens by 25 percent, to 20 euros or roughly $30 each. But apart from the scale of the rise, what the vendor did is no different from what companies are doing across Europe with necessities and luxuries alike – making consumers pay the bill for soaring raw materials costs, in turn caused by the rising price of industrial and agricultural commodities worldwide.
Companies such as Nestle and Unilever, whose branded produce goes into the kitchens, bathrooms and cleaning-cupboards of most homes in Europe, raised prices last year to offset surges in raw material costs, and the same tactics apply for the rest of this year, according to recent declarations from the firms.
How long they can avoid taking some of the hit themselves at the profit-line is anybody’s guess, although Nestle hopes the pressure will start to ease later this year. So do politicians although some fear wage demands might spiral out of control and further fuel inflation, as happened in the 1970s.
Belgian supermarket group Delhaize says it is beefing up its offer of own-label goods to cater to budget-conscious customers as competition intensifies with no-frills hard-discounters. Carrefour, the world’s second-biggest hypermarket group by stock market value after Wal-Mart, says many of the price rises it sees are for things other than the foodstuffs that tend to dominate the headlines.
Hard times
In any case, rising everyday costs are squeezing households and compromising the consumer spending revival economists have been predicting for some time now. Disposable incomes will shrink this year for the first time in a decade in the euro zone, economists at UBS bank predict.
Germany, Italy and Spain could be the worst-hit, according to UBS chief European economist Stephane Deo and colleagues. Indeed, monthly retail sale surveys, although not considered the final word, reveal tentative signs of damage already. Retail sales dropped for a second month running in March in the euro zone, according to the EU statistics office, Eurostat. They also slumped in Britain, according to the Confederation of British Industry.
Marco Annunziata, economist at UniCredit bank, said what is more troubling is the price rises go hand-in-hand with slowdowns in housing markets in some countries and the crisis in financial markets that is making banks idreluctant to extend credit. “In Europe, we had just reached the stage where we expected consumers to take up the baton and replace exports as the engine of growth,” he said. “Instead, consumers have been hit first by a depressing daily flow of news about the (markets) crisis, then by lower equity and house prices, and finally by the incessant rise in food and fuel price.”
European economic growth, or gross domestic product, staged a significant acceleration in 2006, when GDP in the euro zone rose 2.8 percent, followed by 2.6 percent in 2007, way more than the average of the preceding five years. But much of the pickup was driven by company investment and exports, while consumption grew at a softer pace of 1.9 percent in each of the two years.
Passing the buck
Whatever the more official indicators show, companies seem to be counting for the moment on the belief that price inflation in oil, food and industrial commodities will ease, and with it the conflict between profit protection and consumer demand.
The European Commission last month predicted that euro zone inflation would jump more than forecast to 3.2 percent this year but ease to 2.2 percent in 2009. Germany’s position as the world’s top exporter has for years helped its economy to cope while demand from its own consumers remained depressed. Consumption, according to national accounts, has barely been positive in the last five years with the exception of 2006, when a 0.9 percent rise – half the average rise in the euro zone as a whole that year – raised hopes of a renaissance.
Unilever, the consumer goods giant that produces Lipton tea, Domestos bleach and Flora margarine, said last week that sales volumes in Western Europe more or less stagnated in the first three months of 2008, and shrank in Germany. The year had not got off to a good start in Germany, company executives told investment analysts in a conference call after the publication of the group’s first-quarter results. While the German central bank measure of retail sales showed a fourth monthly increase in March, of 0.2 percent, that measure showed sales actually shrank marginally once cars and sales at car-fuelling stations were stripped out.
In Germany, and much of the rest of Europe, drivers have to spend 40 to 50 percent more now to fill their fuel tanks than at the start of 2002, according to the latest survey data published by Britain’s Automobile Association. Unleaded petrol cost an average 0.94 euros per litre back in January 2002 in Germany, and 1.43 euros in April 2008, AA data show. The picture is much the same across the continent. That is a price that has been steadily rising for years and is not just of the temporary kind that many forecasters hope will be the case for other items of everyday life.
If Annunziata at UniCredit is right, the chances of revival in consumer demand are even further compromised by slowdowns in housing markets, primarily in places such as Spain, Ireland and Britain, but France too to an extent.
The blow so far is nothing as bad as the U.S. housing slump and sub-prime mortgage market meltdown which have reduced growth to a trickle in the world’s biggest economy. Pending more definitive evidence on the trend and above all the scale of housing market downturns in Europe, there are some tentative signs that banks are becoming less willing to provide credit, as they themselves feel the pinch from a squeeze in the financial markets where they get short-term funding.
According to the latest survey by the European Central Bank, commercial banks which were falling over each other to grant home purchase loans in several European countries not so long ago are getting more stringent. Jennifer McKeown at London-based Capital Economics says it’s too early though to rule out consumer spending as a source of economic dynamism, noting that retail sales have in fact risen in total value, if not in volume, in recent months, and that inflation should soon start to recede.
However, she conceded that a rise in total value of retail sales probably means consumers are paying more to obtain less. “Indeed, if inflation remains at or close to recent high rates, it might not be long before households are forced to cut back on discretionary spending in order to pay bills or buy food,” she said.