Ajay Rajadiaksha is Global Head of Research at Barclays. Here he argues that markets are very concerned about consumer-led recessions.
For months, markets have been waiting anxiously for an answer to the question – how is the Western consumer doing? After all, consumption accounts for more than two-thirds of the activity in many countries, and consumers have recently been exposed to it.
The answer seems very clear.
Food and gas prices exploded after the Russian invasion of Ukraine. Energy inflation is rampant in Europe; German energy costs rose 35 percent year-on-year last month. Country after country is limiting grain exports as prices skyrocket and food security becomes an existential threat to the regimes. (Just last week India banned all wheat exports).
That’s a big greasy punch in the face for many families. Despite all the talk of underemployment, wages are not keeping pace with inflation. Wages in the US range from 5-5.5 percent while inflation is currently 8.3 percent. Even Europe is far behind. Spain’s inflation rate is 10 percent while salary increases are less than 2.5 percent.
And things can go wrong. Russian natural gas still flows to most of Europe. But this could change. If the planting season in Ukraine and Russia is affected, the world will struggle to feed itself in the coming months.
So yes, there is no distance A swarm of locusts is on the horizon, but everything else can go wrong.
No wonder Western consumers are in a gloomy mood. Survey after survey shows their confidence is at its lowest level in decades. Consumer sentiment in the United States has worsened to lows Since mid 2011. German consumer confidence Now less than May 2020, when the nation was experiencing a prolonged Covid-19 lockdown. In the UK, consumer confidence is now at the level The lowest levels eversince records began in 1974.
With such gloom and soul-crushing agony, it seemed only a matter of time before Western consumers would turn off the lights, pull their hoods over their heads, and stop spending. It seems that now is the time.
Several major US retailers reported first-quarter earnings last week, and it wasn’t very good. Walmart and Target lowered earnings guidance and complained of weak consumer demand, especially for higher-margin items. Sure, there were some management hiccups, too, but investors weren’t late to take a second look: They fled in droves.
Walmart and Target had their worst trading days since Black Friday 1987. These were moves you normally see in cryptocurrencies, not boring core retailers.
Most tellingly, the damage has extended beyond these companies. The S&P 500 is down more than 4 per cent and the Nasdaq is down almost 5 per cent, their two worst consecutive trading days of 2022. In the minds of the market, the results finally seem to confirm what investors have been dreading since the start of the year: the consumer is finally in trouble, and may be Recession looms.
Not so fast. It’s a neat theory, all wrapped in an arc. However, the collected data do not prove this.
Early last week, just as Walmart and Target were reporting, US retail sales surprised to the upside, including strong revisions for March. UK retail sales in April grew 1.4 per cent in April, even as consumer confidence declined. European PMI surveys were surprisingly strong in April. Consumers keep Says We freak out, and they have good reason to do so, but decisively They are still spending.
What’s going on? Why does consumption hold up despite so many headwinds? Because there’s a tailwind, too.
First, unemployment rates are at or near record lows in both the United States and Europe. Yes, real wage growth is negative at the moment, but pretty much everyone is working – which is very positive.
Second, Western households have lots and lots of extra money – money they didn’t spend on services during the covid-affected years of 2020 and 2021. The numbers are huge; American households, for example, have several trillion dollars more in savings than they would have had if Covid never happened. They seem willing to indulge in these savings to fuel consumption even as real incomes are damaged.
The third is the changing nature of consumption. As we emerge from the pandemic, service activity is increasing. We eat more, take those vacations we didn’t take in 2020 and 2021, and business trips resume. Unfortunately, seller analysts are sent around the world again (I am writing this article on a business trip in Asia). There’s a tourism boom going on in the US and Europe right now.
We will be spending less dollars on goods this year, especially given the frenzy of buying most of us experienced in 2021. This shift away from goods is likely to disproportionately hurt the companies that make or sell these goods, which are mostly the big companies we see Listed on the stock market.
But it does not indicate the decline of the consumer in general. Instead, we spend more but at places like the local restaurant and hair salon in the neighborhood and on that family trip.
This is not an argument for unbridled optimism. One of the places where consumption is taking a big hit is China, like zero covid approach affect activity. Financial markets are creaking everywhere, and central banks are unmoved – and that’s not a recipe for stimulating consumers’ moods.
But a consumer-driven recession in 2022 is still highly unlikely, at least in the US, no matter what stocks sounded like a cry last week. For now, investors should only focus on what Western consumers are doing and ignore what they have to say.