Iran War Shocks Eurozone Consumer Recovery: Expectations Trump Income

The eurozone's consumer recovery has hit a snag due to the Iran war. According to an analysis by the European Central Bank (ECB), consumption growth fell to around 2.5% in April, down from its previous range of 3-4%. This decline is twice as large as historical patterns would suggest.

The ECB's findings indicate that households did not need to experience a direct loss of income or jobs before reducing spending. Instead, the war altered their expectations, which in turn affected their consumption.

This development poses a problem for policymakers who have been relying on domestic demand to offset weak industry and patchy investment. If households become more cautious in response to external conflict, the recovery becomes more exposed to events outside the eurozone's control.

The impact of geopolitical pressure on household demand is particularly relevant. Discretionary spending on travel, restaurants, durable goods, and services can respond quickly to uncertainty but also recover quickly if confidence returns.