While myriad challenges remain for manufacturers, brands and retailers doing business in Europe, there is some cause to rejoice: U.K. and Continental consumers have a new spring in their step, while quantitative easing in the euro zone has begun to bear fruit.
The weaker euro is set to boost exports, the region’s economies are growing modestly and inflation is set to reach healthier levels next year.
But some commercial and financial headaches remain: While companies will benefit from a weaker euro, pricing and the threat of gray market sales have become a hot-button issue for brands such as Chanel and Burberry that trade internationally. Russia, once a growing, fashion-loving market, has disappeared from the retail scene due to geopolitical problems and a devalued ruble, while the uncertainty surrounding Greece’s future in the euro zone continues to hover.
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Yet the European Commission took an upbeat tone in its spring economic forecast published earlier this month, predicting that real gross domestic product in 2015 is now expected to rise 1.8 percent in the European Union and 1.5 percent in the broader euro area, and will be, respectively, 0.1 and 0.2 percentage points higher than projected three months ago. For 2016, the EC is forecasting growth of 2.1 percent in the EU and 1.9 percent in the euro area.
The report said Europe’s economies are benefiting from a number of positive tailwinds, including relatively low oil prices, steady global growth, a depreciating euro and “supportive” EU economic policies such as quantitative easing by the European Central Bank. The QE policy, unveiled in January, is contributing to lower interest rates and expectations of improving credit conditions, the forecast said.
“The European economy is enjoying its brightest spring in several years, with the upturn supported by both external factors and policy measures that are beginning to bear fruit,” said Pierre Moscovici, European commissioner for economic and financial affairs, taxation and customs, referring in part to the $1.3 trillion fiscal stimulus plan to jump-start the region’s languid economy.
“But more needs to be done to ensure this recovery is more than a seasonal phenomenon,” Moscovici added. “Delivering on investment and reforms and sticking to responsible fiscal policies are key to obtaining the lasting jobs and growth Europe needs.”
Inflation, another European bugbear, is expected to remain close to zero in the first half of 2015, mainly due to the effects of the fall in energy prices. However, the EC said consumer prices should pick up in the second half and even more so in 2016 as domestic demand strengthens, output gaps narrow, the effects of lower commodity prices fade and the depreciation of the euro triggers higher import prices. Annual inflation in the EU and the euro area is expected to rise to 1.5 percent in 2016 from 0.1 percent this year.
The EC’s growth forecasts look even brighter considering the rocky start to the year. In January alone, Europe slipped into deflation, the price of Brent crude oil dropped below $50 a barrel for the first time in nearly six years, and the Swiss National Bank made a shocking decision to de-peg the franc from the euro, sending that currency soaring and threatening exports. The Swiss franc has since settled down, and is trading at 0.96 euros and $1.08.
Consumers have begun spending again. According to IHS Global Insight analysis, overall business and consumer confidence in the euro zone are above long-term norms and at a level that should be supportive to growth.
“It is notable that consumers’ perception of whether it is a good time to make major purchases now and over the next 12 months both rose in April to be at their highest levels since September 2001 and April 2008, respectively,” said Howard Archer, IHS Global Insight chief U.K. and European economist, in his report for the month.
Archer’s report added that euro-zone consumers’ purchasing power is getting a “serious boost from deflation,” while euro-zone labor markets are showing clear improvement overall.
“The fundamentals are particularly positive for German consumers, who are also getting decent wage increases,” the report said.
The U.K. consumer, too, has a new energy. Consumer confidence around household disposable income was at its highest in more than three years in the first quarter, according to the latest Consumer Tracker from Deloitte. “With the recent return to real wages growth and further falls in unemployment, consumer finances are starting to normalize,” said Ian Stewart, chief economist at Deloitte. “This points to an acceleration in consumer activity and suggests 2015 may well be the best year for consumer spending since 2005.”
Ben Perkins, head of consumer business research at Deloitte, said in the same report, “the foundations for a [U.K.] consumer recovery have been laid and the improvement in consumers’ financial positions looks set to continue, which should mean further rises in spending this year. Furthermore, with low interest rates, household debt interest payments as a share of income are also expected to remain low.”
The uncertainty surrounding U.K. elections has evaporated for many. In defiance of the preelection polls, the Conservative Party won the election, with David Cameron remaining as prime minister, and his new government will have a parliamentary majority of 12.
While it should help Cameron’s program, observers point out that the new government’s slim majority means it will still face significant challenges in maintaining its austerity program and stimulating economic growth.