Global Consumers’ Surprising Resiliency Is Tested Anew by War

(Bloomberg) -- The consumers who drive the global economy have remained surprisingly resilient as the Covid-19 pandemic pushed inflation to 40-year highs, made certain goods scarce and upended the job market. Now a geopolitical storm will test anew their appetite and ability to spend.

Energy and food prices, both key forces behind inflation, may be pushed even higher by the escalating Russia-Ukraine conflict. That will ripple back to households across Europe and the U.S., where shoppers have already faced sticker shock on everything from cars to avocados. In addition, borrowing costs have already begun to rise as central banks pare back emergency pandemic stimulus.

“We are entering recession-like spending behavior without a recession,” said Marshal Cohen, chief retail industry adviser at NPD Group, describing a phase when consumers begin to think twice about making purchases.

Indeed, shoppers' willingness to splurge shows early signs of fading. Growth in U.S. consumer spending has slowed in the last few months as government aid programs end and inflation makes it harder to stretch a paycheck. An increasing share of low-income Americans are already worried about paying bills on time.

Consumer sentiment has soured, now at a decade low in the U.S. and remaining below pre-pandemic levels in Western Europe. Russia's incursion to Ukraine, the biggest ground attack in Europe since World War II, could drag it even lower.

How consumers react is key for the pace of the ongoing global recovery from the pandemic recession. Households across the U.S., European Union and U.K. spent roughly a combined $26 trillion last year, accounting for the majority of gross domestic product in those places and more than a quarter of the world economy.

‘Luxury' Visit

Utility expenses and fuel fill-ups are taking larger bites out of families' bank accounts. Investec estimates that annual energy bills for an average U.K. household may rise to 3,000 pounds ($4,023) in October, an increase of 160% from the previous year. Bloomberg Economics estimates that higher fuel, gas and electricity bills will cost euro-area consumers an extra 100 billion euros ($113 billion). 

In the U.S., disposable income has been largely flat since mid-2021. Fuel oil and electricity prices advanced 27% from a year ago in January while gasoline at the pump has reached a seven-year high at $3.60 a gallon.

That has Jacob Tovar, a student at Texas A&M University, limiting trips to see family.

“My little brother lives in Houston, and I would go visit him, but now driving is kind of a luxury,” said Tovar, 21.

If oil prices stay elevated, it could choke spending elsewhere.

“People will pay it,” said Andrew Gross, a spokesman at U.S. auto association AAA. “People are going to still keep driving. They're just going to figure out other ways to budget it.”

Savings built up during the pandemic may help mitigate the shock of high energy prices. But these savings are unequally distributed across households, with those hardest hit by higher bills having the smallest buffers. In the U.K., a decline in consumption by low-income households could shave 0.4 percentage point off economic growth this year.

New Unpredictability

As companies have raised prices to shoulder higher wage expenses, elevated freight costs and supply chain snarls, shoppers largely haven't balked. Now, though, costs for plastics, polyester and other fossil-fuel-derived materials could rise even higher along with oil prices, adding to inflation pressures. That may weigh on sentiment and spending.

In the U.S., those dynamics could send shoppers flocking to big-box chains such as Walmart Inc. and Target Corp., destinations known for their low prices that people historically turn to when looking to stretch their dollars.

Still, retailers of all formats will have to work hard to entice customers after the pandemic-era spending binge. That time “was a very opportunistic purchasing period. But now consumers have upgraded everything,” Cohen said. If, for example, a shopper bought a new television in 2021, it will be exceedingly difficult for stores to lure her to buy another anytime soon.

U.S. unit sales of discretionary general merchandise were 11% lower in January 2022 than in January 2021, sending dollar sales 1% below last year's levels, according to NPD Retail Early Indicator information. 

Now, the Russia-Ukraine conflict adds a new layer of unpredictability for consumers -- especially for those for whom it is closest to home.

“Europe is going to be more affected by this because they're on the front lines of all of this,” said Jay Bryson, chief economist at Wells Fargo & Co. “If you're sitting in Germany, and now you see the borders of Europe potentially getting redrawn here, that could potentially have some worrying effects on consumers.” 

Russia is one of the world's leading exporters of natural gas and agricultural fertilizers, leaving the global supply chain for those industries vulnerable to disruptions from sanctions or fighting.

Pricing Puzzle

The tension between largely healthy economic conditions and consumers' weariness makes a puzzle for companies setting their shelf and menu prices. Packaged-goods giants Kellogg Co. and Coca-Cola Co. have warned recently that consumers may start spurning price hikes.

Macy's Inc. said its ability to raise prices has varied by item. With certain big-ticket furniture pieces, customers accepted higher prices. But for its cheapest sofas and mattresses, shoppers pushed back. That led the department store to make adjustments and underscores that consumers are selective about where they'll wave off increases.

By comparison, Chipotle Mexican Grill Inc. executives said in February they'd seen no resistance to the burrito chain's higher menu prices.

Companies can count on those conditions continuing to change. 

“With savings and stimulus checks from 2020 and 2021, many consumers have willingly paid higher costs,” lead author Natalie Kotlyar said in a BDO USA LLP report that surveyed 100 retailer chief financial officers. “But as aid is phased out, we are likely approaching a price cliff, beyond which consumer demand may drop off.”

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