Wednesday, August 29, 2012

The Hurting Households of Europe

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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