Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Europe's Consumer Confidence Is Bouncing Back
Transcript
- Lucas: So the Eurozone consumer confidence index just posted its fourth straight monthly gain, hitting minus eleven point six in May. That's the highest reading since February of 2022, right before the war in Ukraine started. Luna: That's a pretty dramatic swing. A year ago we were at minus twenty-four. What's actually driving it? Lucas: The headline story is energy prices. Natural gas in Europe is down about forty percent from last year's peaks. But if you look beneath the surface, the recovery is very uneven. German confidence is still in the dumps — minus twenty — while Spain and Italy are flirting with positive territory. Luna: Right, because Spain and Italy never had the same industrial exposure. Their energy mix is more diversified, and they've benefited from tourism rebounding hard. Lucas: Exactly. Spanish GDP grew at an annualised rate of about three percent in the first quarter. Germany barely grew at all. So the confidence gap reflects a real economic divergence. And that creates a headache for the ECB — one policy rate for two very different economies. Luna: It's interesting you mention the ECB headache because the other factor here is the labor market. Unemployment in the Eurozone is at a record low of six point four percent. That's giving households income security even if prices are still high. Lucas: That's the key counterweight to sticky inflation. Wages are finally catching up. The ECB's latest wage tracker shows negotiated wage growth running at about four point five percent. Not enough to fully offset the cumulative price shock, but it's rebuilding purchasing power. And when consumers feel their job is safe, they're more willing to spend. Luna: But there's also a geopolitical layer here. The Iran war is pushing up energy costs globally — CNBC just reported the average U.S. household is paying an extra four hundred and fifty dollars a year on gas and energy. Europe has been somewhat insulated because they diversified supply after the Ukraine shock, but it's still a risk. Lucas: That's the wildcard. Europe's energy storage is at ninety percent capacity heading into summer, which is very comfortable. But if the Iran conflict escalates and disrupts tanker routes through the Strait of Hormuz, the natural gas price could spike again. And confidence is fragile — it doesn't take much to knock it back. Luna: So the question is: is this confidence rebound sustainable, or is it a sugar high from lower gas bills and a tight labor market that could reverse quickly? Lucas: I think it's more than a sugar high, but it's not a straight line. The confidence gain is happening alongside a real improvement in real household incomes. Inflation is down to around two point four percent in the Eurozone, wage growth is above that, so real incomes are rising for the first time in three years. That's structural. Luna: But the divergence matters. If German consumers are still gloomy, that drags on the overall reading and on growth. And Germany is still the Eurozone's largest economy. Lucas: Yeah, and German manufacturing is still in contraction. The PMI has been below fifty for over a year. But even there, the services sector is holding up. So the pessimism is concentrated in industry, not the broader population. The household survey shows German consumers are actually slightly more optimistic than the business surveys suggest. Luna: That's a nuance I haven't heard. So maybe the German consumer is more resilient than the CEO class. Lucas: Exactly. And that's why I think the confidence data is telling us something real. Households are looking at their own finances — stable jobs, slightly higher wages, lower energy bills — and they're feeling better. The business surveys are looking at export orders and geopolitical risk and they're more cautious. Both can be true. Luna: We should also mention the role of fiscal policy. The Italian government's tax cuts for low-income households and the Spanish fuel subsidy extensions are putting cash directly into people's pockets. That's not ECB policy, but it's boosting confidence. Lucas: Absolutely. Italy's budget deficit is running at about four and a half percent of GDP, which is high, but the government is prioritizing household support. And the EU's fiscal rules are suspended until 2027, so they have room. That's a key difference from the austerity era after 2010. Luna: And a quick honest thing — if walking through the economy with us has made something click, a small number of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's what funds making this many episodes ad-free. No pressure, just a note that it's listener supported. Lucas: Yeah, and we're grateful for every one of them. It keeps us independent. So back to confidence — what's the one number you're watching to see if this trend holds? Luna: For me, it's the services inflation print. If services inflation stays above four percent, the ECB can't cut rates quickly, and higher rates will eventually hit consumer sentiment through mortgage costs and loan payments. Lucas: That's a good call. Services inflation was at four point one percent in April. The ECB wants to see it below three before they feel comfortable cutting. So the confidence rebound is partly a bet that the ECB will ease policy later this year. If that bet is wrong, confidence could stall. Luna: And what about the external sector? The trade-weighted euro is at one hundred nineteen, basically flat year-to-date. That helps exporters, but it also means imported energy costs aren't falling further. Lucas: Right. The euro has been remarkably stable against the dollar, around one point sixteen. That's a tailwind for energy imports but a headwind for tourism exports from Southern Europe. So far, the tourism boom has overwhelmed that — Spain had record visitor numbers in April. But it's a balancing act. Luna: Let me play devil's advocate. Some economists argue that consumer confidence is a lagging indicator, not a leading one. People feel better after the economy has already improved. So maybe this rebound is just reflecting past data, not predicting future growth. Lucas: That's a valid critique. Confidence indexes are noisy. But the magnitude of the move — from minus twenty-four to minus eleven over four months — is unusual. And historically, when confidence improves this sharply, consumption follows within two to three quarters. We saw it in 2015 and again in 2017. So I think it's more than rearview mirror. Luna: And there's a specific cohort driving this: younger households. The under-thirty-five demographic shows confidence at minus five, which is basically normal. They have lower fixed-rate mortgages, they're benefiting from tight labor markets, and they're less exposed to energy costs because they rent or live in smaller spaces. Lucas: That's a crucial point. The recovery is generational as well as geographic. Older households with savings are still cautious because of the inflation scar. But young people are spending. And that's showing up in the services PMI — travel, dining, entertainment are all booming. Luna: So where does that leave the ECB? Lagarde has been dovish, but the data dependent mantra means they need to see the confidence translate into actual demand without reigniting inflation. Lucas: My guess is they cut rates in July by twenty-five basis points. The confidence data gives them cover — it shows the economy isn't collapsing. But core inflation at two point seven percent means they won't rush. They'll want to see one more quarter of wage data. Luna: And the market is pricing about seventy basis points of cuts by year-end. So a July cut is very much in play. Lucas: Final thought: the confidence rebound is real, but it's fragile. If the Iran situation escalates, or if U.S. tariffs on European goods broaden, it could reverse quickly. For now, though, the Eurozone consumer is feeling better than they have in four years. And that's a story worth watching. Luna: Agreed. Thanks for walking through it. Lucas: Thanks. We'll keep tracking it.