By John Leer
November 13, 2020 at 2:59 am ET
Consumer confidence in the five largest E.U. countries has consistently declined since the beginning of October, roughly coinciding with an increase in the spread of the coronavirus in these countries. This decrease in confidence reflects deteriorating economic conditions and signals future weaknesses in retail spending in Europe.
Consumer confidence across the five largest economies in Europe has steadily decreased since the beginning of October.
As of Nov. 9, Morning Consult’s daily Index of Consumer Sentiment is 4.96 percent lower on average across the five largest economies in Europe than it was as of Oct. 1. The ICS fell particularly sharply in Italy (13.22 percent) and France (6.17 percent).
The United Kingdom is the exception, with confidence actually increasing since Oct. 1. One of the reasons the United Kingdom is an expectation is that the peak in confidence occurred much earlier there than it did in the four other E.U. countries. For Spain and the United Kingdom, the ICS began falling in late July when the United Kingdom imposed additional restrictions on tourism to Spain.
From the perspective of economic policy, the uniqueness of the United Kingdom relative to continental Europe supports its decision to leave the European Union. If the United Kingdom continues to respond to economic shocks differently from the economies of the continent, then centralized policy responses are less likely to appropriately address economic reality unique to the United Kingdom.
The decrease in confidence in Europe has more to do with the number of new coronavirus cases than it does with the recently enacted lockdowns and confinements.
The timing of the initial decreases in confidence closely corresponds to increases in the number of new cases and predates many of the recent lockdowns and confinements. The average number of new cases began increasing in Germany, France, Italy and Spain during the final week of September and into early October. As of Oct. 21, the virus has been spreading faster in the United Kingdom, France, Italy and Spain than it has been in the United States, on a per capita basis. Of these five E.U. countries, Germany is the only country where the per-capita spread of the virus remains lower than it is in the United States.
Increases in the spread of the virus prompted all five E.U. governments to impose lockdowns, confinements or curfews starting in late October and early November, well after the ICS in these countries already began to decrease. While announcements of a lockdown can impact the ICS for a day or two, they have yet to materially alter trends in consumer confidence beginning in late September.
Consumer confidence is strongly negatively correlated with the spread of the virus, but this empirical relationship changes over time. When new cases in a country are increasing as they are currently in Germany, France, Italy and Spain, consumer confidence tends to fall, resulting in a strong negative correlation. On the other hand, when the number of new cases stabilizes or even decreases, the relationship between the virus and consumer confidence weakens, as is the case currently in the United Kingdom.
The reaction of consumers to the virus is consistent with the message conveyed by epidemiologists and public health experts regarding the need to “flatten the curve.” Consumers across these five countries only care about the economic effects of the virus when the spread of the virus accelerates.
Changes in consumer confidence since the onset of the pandemic are reflected in changes in retail spending. The table below shows the correlations between Morning Consult’s monthly Index of Consumer Sentiment and its five components and monthly retail sales, excluding automobiles and motorcycles. All values are monthly percentage changes, and the retail sales values are seasonally and calendar adjusted.
There is a clear positive correlation between the ICS and monthly retail sales in Europe, meaning that retail sales tend to increase when the ICS increases. The strength of the correlation ranges from strong in the case of Spain (0.93) to moderate or even weak in the case of Germany (0.40).
The strength of the correlation between consumer confidence and retail sales closely corresponds to the rank ordering of per capita new cases in these five countries. France and Spain have consistently had more new cases per capita than the United Kingdom, Italy or Germany, and the correlations between confidence and retail spending are highest in France and Spain. Similarly, the outbreak of the virus in Germany has remained relatively contained compared to these other four countries, and the correlation between confidence and spending is relatively low in Germany. As the spread of the virus increases across these European countries, consumer confidence is likely to do an even better job of tracking changes in retail sales.
The table also shows that changes in the current buying conditions component of the ICS do the best job of tracking changes in retail sales for Germany, the United Kingdom, France and Italy. This empirical relationship makes sense since retail sales during the pandemic have been driven by sales of durable household goods. The current buying conditions component value is based on respondents’ answers to the question: “About the big things people buy for their homes — such as furniture, a refrigerator, stove, television and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?”
The current buying conditions component did not outperform for all five countries. Retail sales in Spain are most strongly correlated with the current conditions personal finances component of the ICS. However, even in Spain, the correlation between retail sales and the current buying conditions components of the ICS is strongly positive and not significantly weaker than it is with the current conditions personal finances component.
Retail sales in France, Italy and Spain are likely to contract in October based on monthly consumer confidence data, and November does not look much better.
This data paints a worrisome outlook for the future of retail spending in Europe through the end of November. Even without additional increases in the spread of the virus, retail spending across three of the five largest economies in the EU is on pace to contract in October and November.
Monthly consumer confidence data in France, Italy and Spain clearly point to a contraction in retail spending in October. In France, the current buying conditions component of the ICS contracted by 3.72 percent in October and is on pace to contract by another 4.95 percent in November. In Italy, it contracted by 5.8 percent in October and is on pace to contract by another 1.10 percent in November. In Spain, it contracted by 1.7 percent in October and is on pace to contract by another 1.38 percent in November.
The confidence data in Germany and the United Kingdom indicate more modest decreases in retail spending in October and November. The United Kingdom shows a 2 percent contraction in October without a significant change in November. Given the relatively low correlation between confidence and spending in Germany, it would be inappropriate to read too much into this data.
This outlook assumes that countries across Europe are able to control the spread of the virus, as supported by signs of stabilizing new cases in all five countries. However, as discussed previously, both the value of consumer confidence and its ability to track changes in retail spending are a function of the spread of the virus. If new cases were to increase through the rest of November and into December, consumer confidence and retail spending in all five countries is likely to suffer even more in November.
For that reason, the strength of retail spending in the European Union remains a function of the spread of the virus. If the recently imposed lockdowns and curfews across Europe are able to flatten the curve and limit the spread of the virus, they are likely to succeed in stabilizing consumer confidence and driving future retail sales.