European Consumers Remain Confident Despite Attacks and Looming Downturn

Barbara Neumann was so shocked when terrorists attacked the U.S. Sept. 11 that she canceled plans the next day to buy a sporty new Opel convertible. Like many other Europeans, she put all thoughts of shopping on hold as she watched events unfold on television.

A week later, though, the 40-year-old assistant at a Hamburg machine-tool maker rescheduled her appointment at the Ernst Dello Opel dealership and plunked down 52,000 German marks (26,600 euros, $24,000) for a silver-blue Astra ragtop with black leather seats and a CD player.

“I just decided that I still needed the car, and that life goes on,” Ms. Neumann says. “I concluded that it was OK to do this.”

Her fleeting paralysis illustrates how European consumers may be bouncing back more quickly from the shock of the attacks than their American counterparts, who themselves have shown surprising resilience. While purveyors of luxury goods and travel-related companies continue to struggle, some European retailers report that activity in stores has largely returned to normal. Conversations with shoppers and merchants in London, Paris, Berlin and several other European cities found consumers still willing to make big-ticket purchases. That will come as good news to European Union finance ministers, meeting today in Luxembourg; the commission’s own budget forecasts are based on expectations that consumer spending won’t fall dramatically.

Still, there’s little doubt consumers will ease off spending as the European economy slows in coming months, say economists and retailing executives. Some governments are preparing for it: The French budget, being presented to the National Assembly Tuesday, is expected to contain a stimulus package. And it’s still too early to draw definitive conclusions about the long-term effects from the Sept. 11 attacks. The strikes, economists figure, will still delay the upturn expected early next year in Europe by a quarter or two, and all bets would be off if terrorists rattle nerves with additional large-scale slaughter. The same would likely be true if the fighting in Afghanistan escalated into a full-blown war and spilled over into neighboring countries.


But for the moment, the specter of a sharp drop is receding. That’s a glimmer of light in an otherwise gloomy outlook, since it means consumers could continue to shore up economic activity at a time when manufacturing is in recession and corporate investment has plunged. In Germany, for instance, spending on machinery and equipment has stagnated this year after jumping 9% in 2000.

“The very general trend is a slowdown,” says Serge Weinberg, chief executive of French retailer Pinault Printemps Redoute SA. “But there is no reason to think that this trend is transforming itself into something terrible.”

The reasons for this are clear: Individual Europeans remain largely insulated from gyrations in the stock market and the feelings of unease that they can spark. And a relatively benign job outlook, with unemployment in the European Union at 7.6%, down from 8% a year ago, should help keep cash registers ringing.

In the U.K., consumer spending will likely grow 2.6% in 2002, according to an early October survey by Consensus Economics Inc. in London. That’s down from 3.5% this year, but not bad compared with the 1.4% growth that economists expect in the U.S. next year. In France, spending is expected to grow 2.1% in 2002, down from 2.5% this year.

The outlook continues to be somewhat gloomier in Germany, where the flagging industrial sector has pushed up unemployment for 10 straight months, to 9.4% in September. Consumer spending there should continue to grow only anemically through next year, at about the current level of 1.6%, according to Consensus Economics.

Yet consumers across Western Europe are now venturing back into stores following a sharp dip, shopkeepers say. “In the first week everyone was a bit shell-shocked,” says Albert Oziel, sales director at Cascade, a seller of high-end bathroom fixtures near the Place de la Bastille in Paris. “The second week things started to pick up again, and now things are about back to normal.”

Bathroom Shopping

On a recent weekday afternoon, customers trickle into the sun-splashed Cascade showroom to peruse whirlpool bathtubs and sleek glass shower stalls. Among them is Jean-Louis Desmadryl, a tall, gray-suited banker who works at BNP Paribas. Mr. Desmadryl says that he has been planning for six months to renovate a bathroom in his family’s apartment on the Right Bank. He’s not going to let economic uncertainty deter him. He also vows to stick with his original budget of 150,000 francs (22,900 euros or $20,662).

“I’ll always need to bathe,” he says, leaning against a gray marble bathroom counter as his wife examines a wall display bristling with shiny brass and chrome faucets. “I’m going to do exactly what I wanted to do all along.”

Consumer confidence is likely to continue the slow slide that began before the attacks: The latest numbers from France, Sweden and the Netherlands, dating in part to after Sept. 11, are down. Yet confidence remains relatively high, with a reassuring split in the data. “When consumers are asked about the economy as a whole, they are gloomy,” says Ross Walker, an economist at Royal Bank of Scotland in London. “But when they are asked about their own personal finances, they are optimistic — near record levels.”

At France’s Pinault Printemps Redoute, sales at upscale Printemps department stores and the Fnac chain that sells books, music and electronic gear spiked downward after the attacks but have returned to their previous levels, says Mr. Weinberg, PPR’s chief executive. Only at PPR’s discount furniture chain Conforama have sales failed to snap back fully.

British retailer John Lewis Partnership PLC says department-store sales for the week ended Sept. 29 rose 5.7%, compared with 7.5% last year. Gareth Thomas, director of sales and customer service, says the slower sales growth was partly due to rumors of possible terrorist attacks on London. “Against a backdrop of customer nervousness about shopping in the West End, John Lewis’s result was not at all bad,” he says. Out-of-town stores reported generally better sales than London locations, he adds.

U.S. Weakness

In the U.S., by contrast, retail sales posted their weakest showing in September in nine years, dropping 2.4%, according to the federal government. Only a few discount chains, like Wal-Mart Stores Inc., whose sales rose 6.3%, bucked the trend. Leisure hotel bookings and automobile sales are back to pre-attack levels, yet many economists believe the U.S. is now in recession. U.S. consumer confidence hit a five-year low of 97.6 last month, according to the Conference Board’s monthly index, and economists see little hope for an upturn in spending until late next year.

Although experts believe Europeans will keep on spending, they do expect a shift in buying patterns. Vacation travel, especially trips involving flying, is slumping as people stay closer to home. That will likely boost do-it-yourself hardware chains as people put more money into fix-up projects. Luxury goods are taking a hit as consumers get back to basics. Luxury retailers Gucci Group NV and LVMH Moet Hennessy Louis Vuitton SA have both cut their profit forecasts.

“There is going to be a shift to cheap and nice,” says Jose Luis Nueno, a professor of marketing at the IESE business school in Barcelona. “There will be more disposable income because people will cancel travel.”

Why should European consumers be more resilient, at least for the moment, than their American counterparts? For starters, the economic slowdown in Europe is less severe; U.S. gross domestic product growth fell below 1% in the third quarter from a year earlier and is expected stop entirely in the fourth, according to Consensus Economics’ latest survey. Moreover, jobless rates, though they’ve begun to creep upward, are unlikely to spike dramatically, as they are in the U.S. That’s important, since the job outlook is key to consumers’ sense of well-being.

Unemployment in the 12 countries using the euro will rise 0.4 percentage point, to 8.7%, by year end, figures Michael Saunders, head of European economics at Salomon Smith Barney. That would still be below the cumulative 2000 average of 9.1%. U.S. unemployment, by contrast, is at a four-year high of 4.9% and rising fast.

Calming Influence

Falling energy prices and a strengthening euro have eased inflation in Europe, calming consumer nerves. The price of oil spiked earlier this year, a double shock for Europeans, since they were paying for a dollar-denominated commodity with weak currencies tied to the euro.

Then there’s the feeling of personal wealth. In Europe, that sense is less influenced by the wild swings in the stock market than it is on the far side of the Atlantic. While 48% of adults in the U.S. own shares directly or through mutual funds, the same is true of only 13% of French adults and 17% of German adults. Europeans’ equity portfolios are smaller, too: Their average value is $3,000 (3,300 euros) per investor, compared with $14,500 in the U.S., says Mr. Saunders.

Another factor is that Europeans are more accustomed to living with terrorism. Basque separatists, for example, have killed some 800 people in Spain and France since 1968 in their fight for political independence. In Britain, sectarian violence and terror attacks spawned by the conflict in Northern Ireland have claimed more than 3,000 lives — including more than 100 on mainland Britain — since the modern Troubles began in 1969. In Greece, radical left-wing group November 17 has killed more than 20 people since 1975. Such conflicts have simmered for so long that people have become inured to them.

All of this may help explain why September car sales in Germany were down just 2% from those of a year earlier, in line with the trend for the year as a whole. Consider recent events at the Opel dealer in Hamburg where Ms. Neumann purchased her convertible.

Despite the terrorist attacks in the U.S. and worries about a wider war, the Ernst Dello Opel dealership decided to go ahead with its annual autumn party for customers on Sept. 21. In deference to victims of the attacks, the staff did cancel the traditional musical entertainment, and the atmosphere was more subdued than usual.

Yet 10,000 people showed up for the event — just as many as last year, says Kurt Kroeger, managing director of the dealership. And about 10% of them bought cars on the spot. That’s also the same as last year.


José Luis Nueno opinion citation in David Woodruff, Christopher Rhoads and Sarah Ellison’s article published in The Wall Street Journal, October 16th, 2001

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