Nearly every
day, we read some grim news about Europe's economy. The August 2012 edition of the ECB
Monthly Bulletin shows that European households are having a
difficult time. A handful of graphs will show you where the problems lie.
To help keep
the importance of household consumption into perspective, the ECB states that in the first quarter of 2012,
Europe's GDP was 2365.1 billion euros. Of this, household final
consumption expenditures were 1364.3 billion euros or 57.7 percent.
First up,
here is a graph showing annual percentage changes as a percentage of gross
disposable income for household income and consumption growth and savings ratio
:
Real
disposable income declined by 0.5 percent on a year-over-year basis.
Consumption (dashed brown line) grew by a modest 1.9 percent annually,
close to income (solid blue line) growth of 1.8 percent over the same one year
period. The savings ratio (dashed green line) has dropped to near-decade
lows of 13.3 percent, down from nearly 16 percent during the peak of the Great
Recession.
The net
worth of households continues on its downward slide as shown here:
The net
worth of households declined on the back of falling real estate prices; over
the past four quarters, household net worth has declined by 4.9 percent of
gross disposable income. As you can see from the purple line on the
graph, the change in net household worth has swung to the negative side for the
first time since the end of the Great Recession. The household
debt-to-assets ratio reached a historical peak of 14.5 percent as a result of
relatively low savings and decreases in the value of non-financial assets.
Despite massive
intervention by the ECB and the Bank of England, households definitely are not
feeling the wealth effect from their domestic stock market portfolios:
Consumer
confidence is, not surprisingly, "below its long-term average" as
shown on this graph:
This signals
that consumers simply are not willing to spend as is reflected in shrinking total retail sales data (solid blue line).
Lastly,
let's look at Europe's employment picture. In June, the unemployment rate
across the Eurozone hit 11.2 percent, an increase of 1.2 percentage points over
a year earlier despite the fact that this is supposed to be a post-recession
recovery. These two graphs show that further job losses are anticipated in both manufacturing and non-construction employment and that the losses appear to be accelerating:
Here is a
graph showing the unemployment situation:
Unemployment
expectations for 2012 stand at 11.2 percent, rising to 11.4 percent in 2013 and
falling back slightly to 10.8 percent in 2014, hardly stellar and well above what both the United States and Canada are experiencing and expecting.
For those
who are still working, here is a graph showing how compensation in some
countries continues to drop when compared to the euro area:
You will
notice that workers in both Greece and Spain have seen their wages fall back to
the levels that they were at in 2002 and that Ireland is back to levels that it experienced back in 2004.
When you see
all of this data in one place, it make you realize why things in Europe look so
grim. What is even more frightening is that in today's global economy,
all of our markets are intertwined. The United States and the European Union have the
largest bilateral trade relationship in the world with the U.S. investing three
times as much as they invest in all of Asia and the EU investing eight times
the amount in the U.S. that they invest in India and China. Approximately
15 million jobs are linked to the transatlantic economy. In the case of Canada, the EU is its second most important
trading partner after the United States, accounting for 10.4 percent of
Canada's total external trade. Thirty-four percent of Europe's imports
are sourced from Canada.
From this
posting, I hope that you will realize how important the health of Europe is to
the rest of the world's economy and, in particular, how important it is that
Europe's households remain fiscally secure. After all, in our consumer-driven
economy, households are key.
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