European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

RETAIL

TURNOVER IN DURABLE CONSUMER GOODS (INDEX)

Cautiously Optimistic Recessions tend to accelerate emerging trends, forcing structural changes to occur sooner than they otherwise would. This was true during the pandemic recession, when the growth of e-commerce accelerated, resulting in a decline in brick-and mortar retail activity. Growth in e-commerce across Europe accelerated during the enforcement of restrictions and lockdowns, but the reality is that the e-commerce market across certain parts of Europe is fragmented and underdeveloped. The UK and Germany have more mature and established e-commerce markets, with high online penetration rates, at 81% and 77% respectively. In other parts of Europe, the e-commerce revolution is only just beginning; Spain and Hungary, for example, have online penetration rates of 43.5% and 36.5%, respectively. Since the pandemic, growth in e-commerce has somewhat normalised. Consumer behaviour during the pandemic does not match behaviours during past recessions. After lockdown rules lifted across Europe, spending on consumer durables recovered very quickly. Typically, durable goods only rebound once the recession is over. Demand for services fell further than durable goods, largely due to the government interventions in place shutting large parts of the service sector. As of today, demand for durables is beginning to ease, particularly as those transactions were large, one-off purchases. In contrast, demand for services is picking up, which will help insulate the retail demand outlook. To better understand the impending recession’s impact on retail, we first need to understand that not all recessions are the same, and this recession is very different from nearly all previous recessions. Typically, an increase in the unemployment rate (of 30 bps within three months) is an important indicator that the economy is already in a recession. However, during the pandemic recession, furlough plans put in place by policymakers prevented mass job losses. According to the IMF, these job retention strategies helped maintain the euro area’s low unemployment rate, keeping roughly 4 million extra workers employed. Without the interventions, the unemployment rate across the euro area would have been 2.5 pp higher. In our baseline scenario, we expect the unemployment rate to peak at 7.2% in the euro area in 2024 before it begins to trend down. Although the uptick in unemployment is relatively contained, the cause of this recession is tied to the decline in consumer spending power caused by high levels of inflation and more recently, tighter financial conditions.

TURNOVER IN NON-DURABLE CONSUMER GOODS (INDEX)

2008 GFC 2011 Euro Debt Crisis 2020 COVID-19 Recession

110

100

90

80

Index (100=start of recession)

70

1 2 3 4 5 6 7 8 9 10 11 12

Months after start of recession

TURNOVER IN SERVICES (INDEX)

2008 GFC 2011 Euro Debt Crisis 2020 COVID-19 Recession

110

100

90

80

Index (100=start of recession)

70

1 2 3 4 5 6 7 8 9 10 11 12

Months after start of recession

Source: Cushman & Wakefield Research, Eurostat, Moody’s Analytics

The European retail sector has faced several challenges lately. Consumer sentiment has been on a downward trend since September 2021. The consumer confidence index was worse in the summer of 2022 (-28.7) than during the height of the pandemic (in April 2020, -24.8). The European Commission flash estimate showed a slight improvement in consumer

confidence, to -20.9 in January from -22.1 in December, but it remains near record lows.

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