Euro Area Consumers’ Resilience Tested by Higher Inflation and Rising Rates

DBRS Morningstar has published a commentary analysing the financial position of households in the euro area and their degree of resilience in what is now a far more challenging environment.

Key highlights include:

• COVID-19 interrupted the consumer deleveraging trend in the euro area, which nevertheless started to revert in Q3 2020 as income growth rebounded.

• Wages and salaries started growing again post-pandemic, but this will only partially offset inflationary pressures.

• Whilst households accumulated significant savings thanks to government support measures and reduced spending due to pandemic related restrictions, the savings rate is returning to pre-pandemic levels.

• Unemployment reached historically low levels in 2022 after an increase amidst COVID-19. Whilst we expect it to rise again, we view the euro area labour market as resilient.

“Household balance sheets will be strained by increased borrowing costs and elevated energy bills contributing to slowing economic growth,” said Arnaud Journois, Vice President, European Financial Institutions. Carlo Capuano, Senior Vice President, Global Sovereign Ratings, added: “However, past improvements in debt deleveraging, savings accumulated during the pandemic and a so far resilient labour market will mitigate the impact of lower purchasing power. Moreover, a sizeable amount of liquid assets will cushion to some extent the impact of the increasing cost of living as real wage growth becomes negative.”