European Daily Catch: Know Your Consumers
Today’s European Daily Catch compares the aggregate implications of the reported January 1-point rise in French household confidence to the reported January stabilization of Italian consumer confidence. Specifically, French consumers could be ‘happier’ but that doesn’t necessarily mean they’re spending more, while Italian household confidence translates rather directly to aggregate spending patterns.
Domestic demand is a large contributor to GDP growth in both Italy and France. Therefore, inferring patterns of aggregate consumption from higher frequency leading indicators, such as confidence, is important. Confidence measures lead real retail sales numbers, and real retail sales lead the quarterly real consumption patterns. Annual real retail sales growth has a reasonably high correlation with aggregate consumption (the ‘C’ of Y=C+I+G+NX) in both Italy and France, 69%; so gauging real retail sales from consumer confidence could potentially be useful.
Consumer confidence could be a useful tool for predicting consumption, hence GDP, in France and Italy…
…but it’s not in France. See, with a correlation of just 38%, household confidence is a terrible coincident indicator of real retail sales and adds practically no predictive value for aggregate consumption or GDP forecasting. French consumers could be just miserable and still post relatively healthy retail sales and aggregate consumption numbers.
…and it is in Italy. When Italians are depressed (not confident), they spend less. And boy are Italians depressed. The same series, consumer confidence and annual real retail sales growth, has a very high correlation in Italy, 76%. The implication is, that with confidence running 12.5 points below its 2000-2012 average I do not expect real retail sales to rise above the current 4.9% annual decline in November (CPI-adjusted).
Given the recent downtrend in Italian consumer confidence, the likelihood of a December decline in real retail sales is high. But even if it did stabilize at current levels, Q4 real retail sales are running 2.5% below Q3 sales. Therefore, household consumption is likely to decline in Q4, and quicker than its 0.2% drop in Q3.
So the moral of today’s European Daily Catch is when it comes to confidence indicators, know your consumers. Unhappy Italian consumers make poor spenders, while unhappy French households may very well hit the shops. Domestic demand in Italy is shaping up poorly.