Europe Braces for a Tough Six Months, and Some Better Days Ahead
High anxiety.
That’s the mood of consumers, investors and business owners across the U.K. and euro zone following the shock waves of spiking inflation, interest rate rises, and the never-ending threat of recession.
Add to that civil — and civil servant — unrest as European governments shift from a COVID-19 footing, and attempts to control public debt to keep a lid on inflation — and public sector salaries.
Just like Mel Brooks’ character in the satirical comedy “High Anxiety,” some in Europe may feel it’s time to check into the “Psycho-Neurotic Institute for the Very, Very Nervous.”
Strike action has been particularly widespread in the U.K., with nurses and ambulance staff, train drivers, postal workers and border force officials staging prolonged walkouts before, during and after the 2022 holiday season
The Brits aren’t the only ones walking out, though.
In France, doctors went on strike twice in December over fees, working conditions and the enhanced role of nurses in treating patients, while in Italy the powerful CGIL and UIL labor unions organized a series of general strikes and rallies in December to protest the government’s 2023 budget.
There is more industrial action to come in the first half of 2023, which is going to be tough for businesses and consumers alike.
Roland Berger Institute, the research division of the global consultancy, has forecast that one-third of the global economy is expected to “drift into recession” in the coming months, and inflation, although it has begun to abate, will continue to impact consumer sentiment and how businesses behave across the U.K. and Europe.
Anita Balchandani, senior partner and head of U.K. consumer practice at McKinsey, said she recalls the days just after lockdowns lifted, in 2020 and 2021, when the U.K. was one of “the most optimistic countries” in terms of consumer sentiment.
Not any more.
“What you see now is that economic pressures and inflation have had a huge bearing on consumer sentiment. Inflation is probably the number-one thing that the British consumer cares about, even ahead of the war on Ukraine or Brexit. Rising prices are the crunch point for consumers,” she said.
Any consumer rebound in Britain is going to be tied into the cycle of economic recovery, and the abatement of inflation, she said.
“While we don’t have a crystal ball, we’re looking at some of those pressures receding in 18 to 24 months. We have the energy crisis, [rising] interest rates and mortgages to play out. I wish I could say that consumer sentiment will just spring back very quickly, but we think some of the underlying economic drags need to shift in order for consumers to start rebuilding that confidence,” Balchandani added.
The picture is similar in the euro zone. In a report published late last year, Roland Berger Institute said a recession in the euro zone was “likely” in the next months with consumer confidence poised to deteriorate.
Consumer and luxury analysts would agree. In their reports they point to clouds hanging over the next six months, with macro pressures beginning to lift by the second half and a more stable picture emerging.
One analyst who asked not to be named said they foresee more strikes in Europe, which will only dampen consumer demand — and spirits in the coming months.
“I see a lot more strikes coming, and that will create disorganization and a negative mindset among consumers,” they said.
According to a report in The Daily Telegraph, the U.K. public sector strikes in the month of November alone were set to wipe more than 100 million pounds from the country’s economy.
The train strikes in December had a devastating impact on consumer footfall across the country, and especially in London, during the key holiday season.
According to Springboard, which measures consumer traffic, Central London footfall plunged 31% on strike days; in large cities outside the capital it was down 20.7%, while in historic towns it fell 18.7%.
Consumers are only one part of the story.
Businesses also need to brace for tough times and keep a beady eye on inventory. In a high-risk environment they’ve also been forced to examine the fundamentals of their particular businesses.
Balchandani of McKinsey said that retailers have started taking “segmented approaches” to their inventory, focusing on items that have longevity and can trade through the seasons versus items that have shorter shelf lives.
“The retailers that are best positioned are the ones taking a surgical view, line by line, of the stock they’re carrying,” she said. Balchandani added that retailers are holding their nerve and trying to sell stock through, or taking quick action to shift seasonal stock as best they can.
Rick Zullo, a retail investor and a cofounder of Equal Ventures, said that inventory is the biggest issue right now for retailers, many of which are holding “crippling” amounts of stock.
He said retailers that moved excess inventory off the floor to make way for seasonal merchandise “only kicked the can down the road, and they will feel the pain” in the first quarter.
Under pressure from inflation, rising rents and waning consumer confidence on both sides of the Atlantic, they have to keep stock levels tight and de-risk their businesses.
“I don’t think 2023 is going to be the most adventurous year for fashion trends,” he said.
Zullo added that if inflationary pressures continue to persist, middle class spending will flood to value, with consumers trading down, particularly for staple products. “We’ll be looking at a discount-oriented market,” he said.
By contrast, spending on top-end luxury “is likely to remain strong” as it has during past financial and economic crises.
He also believes that brands are likely to make a concentrated effort to shift into omnichannel strategies and increase their exposure to third-party marketplaces, retail, and wholesale versus just direct-to-consumer.
Zullo said that businesses will also be reevaluating how they operate, adding that the chief financial officer, rather than the CEO, will be the new company star.
“We’ll be going back to a world where business is about math rather than sales projections,” a world where investors place more value on a company’s efficiency, earnings power and “survivability” rather than its potential for major sales growth.
Nowadays, he said, “a high rate of growth does not necessarily mean you have a good business.” Growth for the sake of it, he added, “is no longer cool.”
With a cyclone of strike action, inflation, impending recession — and dangerously high inventory levels — tearing through Europe in the first half, there are still a few bright spots in the shape of U.S. tourists in Europe.
The labor market remains robust and if the U.S. swerves a recession (and even if it doesn’t) it’s likely that Americans will still be traveling in Europe (and elsewhere) in 2023, charmed by TV shows including “Emily in Paris,” “The Crown,” and “From Scratch,” which is set in Florence and Sicily.
The dollar remains strong against the British pound and the euro, thanks partly to aggressive interest rate rises in the U.S., while Americans still have pent-up funds from lockdown.
“There is still a lot of cash sitting in consumers’ hands,” said Zullo, who believes that high-end purchasing will be relatively immune to inflationary worries in the first half.
“People aren’t going to cancel their trips” because the stock market is down. He believes that any “pullback on purchasing” will come from the average consumer, rather than world travelers.
If airports remain open, and trains operators go back to work — rather than strike — that’s good news for Americans and Europeans alike.