It now expects consumer price inflation to reach 7 per cent this year and 3.4 per cent in 2023 from 6.4 per cent and 3 per cent respectively earlier on the back of higher energy and food prices resulting from the current geopolitical context. Lower international demand is also expected to dampen growth.
Consumers are starting to feel the squeeze on their purchasing power, especially as rising employment and wage increases are not sufficient to make up for higher prices.
The company still expects significant pandemic-related saving buffers and pent-up demand for services to keep consumption rising, but to a lesser degree than three months ago because financial market turmoil is eroding net wealth.
The eurozone economy's focus has shifted away from COVID-19 toward the inflationary environment and rising interest rates. Yet, recovery from the pandemic remains a key factor protecting the eurozone from a recession so far.
S&P Global expects the growth tailwind from pent-up demand will continue to provide some momentum to activity over the summer, although it will likely fade toward the end of this year.
Even though inflation has exceeded 2 per cent since mid-2021, households have continued to accumulate excess savings, putting aside a significant buffer at close to 7 per cent of the 2019 GDP in the eurozone.
Even lower-income households are today reporting a greater ability to save than before the pandemic. Nonetheless, high inflation is now starting to bite into households' savings buffers.
While COVID-19-related restrictions in the first quarter (Q1) of this year seem to have maintained the consumer savings rate above 2019 levels, this is likely to have changed for Q2 as restrictions were lifted.
This is backed up by the European Commission sentiment survey, with consumers indicting their savings expectations for the next 12 months are now back to pre-pandemic levels.
For now, however, consumers still appear keen to loosen their purse strings. Sizable pent-up demand for services following pandemic-related restraints remains an important impetus for consumer spending, S&P Global said.
Fibre2Fashion News Desk (DS)