Euro zone household consumption fell sharply in the early weeks of the Iran war as confidence tumbled, suggesting that renewed conflict could again thwart consumer spending, a European Central Bank Economic Bulletin article said on Monday.
Euro zone consumer sentiment tumbled after the outbreak of the war but has since climbed a little, even if it remains well below pre-war levels, weakening overall economic growth, which has been modest for years.
The consumption drop in April was twice as large as historical trends would suggest and was comparable in magnitude to households' response to Russia's war in Ukraine in early 2022, the ECB said.
"This suggests that the confidence channel is particularly strong in the case of large shocks that are widely perceived as such by consumers," the ECB argued.
After hovering around 3%-4% on average from mid-2024, nominal consumption growth declined to around 2.5% year on year in April, with the decline driven by higher income households cutting discretionary spending.
"This reinforces the view that the slowdown is not the result of binding income constraints but rather of households postponing purchases when they have the scope to adjust the timing of their spending," the ECB said.
Households also feared that rapid inflation caused by the conflict could erode real incomes and 40% of those surveyed said they did not expect this income loss to be recouped.
