Euro Zone Consumption Suffers Double-Digit Drop Amid Iran War Fears

The European Central Bank's Economic Bulletin has revealed that household consumption in the Euro zone was severely affected by the Iran war, particularly in its early weeks. According to the report, consumer sentiment plummeted after the conflict broke out but has since shown a slight recovery. However, it remains well below pre-war levels, contributing to modest economic growth.

The consumption drop in April was significantly larger than historical trends would suggest, comparable only to households' response to Russia's war in Ukraine in early 2022. The ECB noted that this suggests the 'confidence channel' is particularly strong when dealing with large shocks perceived by consumers as such.

Nominal consumption growth declined from around 3%-4% on average from mid-2024 to approximately 2.5% year-on-year in April, driven by higher income households cutting discretionary spending. This reinforces the view that the slowdown is not due to binding income constraints but rather households postponing purchases when they have the flexibility to adjust their spending.

The survey also showed that households feared rapid inflation caused by the conflict could erode real incomes, and 40% of those surveyed did not expect this loss to be recouped.