Europeans spending less on fun and more on food, energy

New York Times, Straits Times 9 Feb 08;

Consumers feel the squeeze with low wage growth and rising prices of staples
LONDON - THE price of bread has risen 12 per cent in Germany in a year. Butter has increased by 45 per cent, and milk 25 per cent.

'And that is just your breakfast,' said Mr Holger Schmieding, an economist at the Bank of America in London. 'Don't get me started on lunch.'

Across Europe, surging food and energy costs and subdued wage growth are combining to create angst about a loss of purchasing power for the euro, pound, kronor and other currencies in the pockets of shoppers.

A measure of consumer confidence compiled by the European Commission last month fell to the lowest level since early 2006. Retail sales have been falling too.

With staples such as food and energy taking up more of their pay cheques, Europeans appear to be cutting back on discretionary purchases such as computers, clothing and package tours to sunny locales, economists said. They are not happy about it and are demanding action.

Opinion polls showed that purchasing power is a top concern of consumers in France, presenting President Nicolas Sarkozy with one of his biggest economic challenges since he was elected last year.

In Britain, a committee in Parliament announced this week that it planned to investigate the energy market after several utility companies announced double-digit increases in energy prices for local customers.

At a time when the euro is trading near all-time highs against the dollar, complaints about its value might seem misplaced. But analysts said that there were grounds for the complaints about fading spending power.

Across the euro zone, inflation was running at an annual rate of 3.2 per cent last month, the highest level in nearly 15 years, and considerably above the European Central Bank's goal of less than 2 per cent.

The rate is also above the 2.5 per cent increase in labour costs that the bank recorded in the third quarter, showing that price increases were outpacing the growth in wages and eating into the purchasing power of Europeans.

But economists said that consumers' perceptions of a loss in spending power might be running ahead of reality, as the costs of essential items such as food and petrol, which consumers buy frequently, have been rising far faster than the prices of occasional purchases such as electronics.

'What you might call fun spending has been falling as a result,' said Mr Jonathan Loynes, an economist at Capital Economics in London.

In Britain, the problems of higher food and energy costs have, in some cases, been compounded by higher mortgage payments as banks tightened lending standards after the Northern Rock bank incident.

The consumer price index rose only 2.1 per cent last December, but the retail price index, which adds mortgage interest payments to the mix, was up 4 per cent, showing the squeeze on British consumers from higher housing costs.

Meanwhile, food prices raced ahead at a rate of 5.4 per cent.

While the headlines have been full of dire economic predictions linked to the sub-prime lending crisis in the United States, economists said that higher costs for food and energy have been a bigger factor in angering European consumers.

'Forget about sub-prime,' said Mr Schmieding. 'It is the European reaction to food and energy costs that has shaped the data more.'

Some of the consumer gloom pre-dated the increases in food and energy prices and the sub-prime crisis.

The French were grumbling about purchasing power during the presidential campaign last year. Part of it may have more to do with approaching labour negotiations, analysts said.

Train operators at Deutsche Bahn, the German state railroad, recently won an 11 per cent wage increase after a drawn-out strike.

That settlement appeared to have emboldened labour unions elsewhere to set the bar high. Workers in the German public sector, for instance, are demanding a raise of 8 per cent.

Higher wages might make workers feel better in the short term. But without corresponding increases in productivity, analysts said, higher wages simply cause higher inflation.

Meanwhile, European policymakers have little room to manoeuvre. A US-style stimulus package would be difficult to initiate in Europe, analysts said, given the euro zone's strict limits on public-sector borrowing.

NEW YORK TIMES