ECB: De Guindos: Uncertainty & Tighter Fiscal Fears Behind Consumption Conundrum
Sep-18 08:36
- Consumption is one of the conundrums of the present situation in Europe. We have seen a much more limited recovery of consumption over time than we expected. I think that you have two different drivers of consumption in the short term.
- I) There is a clear improvement of real incomes for households because the evolution of the labor market is positive with unemployment very low and employment is positive. Inflation is coming down, so that should improve the animal spirits of consumers in the short term. Why isn’t this feeding through to stronger consumption? I think that it’s about confidence, confidence in the medium term and the concept of permanent income. In that respect there are several factors that perhaps are having an impact, including European political risks and geopolitical risks from Ukraine, building on the Covid experience.
- ii) It could be much more, fiscal oriented. When you analyze fiscal policy, you can have the traditional clinician approach with multipliers, fiscal stimuli in the short term, these kind of things. But there is an additional perception and perhaps here the consumers have started to notice that the fiscal situation is not sustainable over time, and that sooner or later, governments will have to reduce some spending related to welfare, or perhaps to increase taxes. That could be why consumers are reacting because they believe that this Ricardian effect of fiscal policy is there and this is something that we'll have to consider.
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