European Outlook 2022: Consumers set to drive the recovery as Omicron recedes
Though inflation will rightly be the focus of policymakers, we remain optimistic for the year ahead due to the well of pent-up demand from consumers that will be released as Omicron recedes during the warmer months.
There are many reasons to be optimistic about Europe’s economic prospects for the year ahead.
The public health impacts of Omicron appear to be widespread but manageable. Spending data suggests economies are now resilient in the face of new variants. Savings rates reveal a well of pent-up demand and various indicators suggest consumers are eager to spend as the prevailing wave of Omicron subsides during the warmer months.
Downside risks remain, most notably from rising inflation hitting consumer spending power and uneven economic outcomes that have been exacerbated by the pandemic. However, with effective management from policymakers, we expect 2022 to herald robust GDP growth of 4.4% in the UK and 3.9% in the Eurozone (see box 2).1
Early evidence suggests consumer spending was resilient over the Christmas period. Footfall traffic got off to a slow start then accelerated during the week before Christmas, according to Google Mobility indicators.2 Spending held firm – Visa’s UK Spending Momentum Index (SMI)3 registered 114 in December, weaker than November but still above the threshold of 100 that signals expansion. The SMI for restaurants registered 130.9, a sharp expansion that hints at the scale of pent-up demand for social gatherings.
The reintroduction of restrictions at borders in several nations, notably Italy, France and Germany, disrupted travel plans, but by January the situation began to ease. France called off its ban to British visitors as of 14 January, for example, opening the door to a partial rebound of winter travel to ski destinations.
Disruption as a result of Omicron will persist over the short term, impacting workplaces, schools, hospitality venues, as well as the regular working of public services, but a growing body of evidence suggests the current wave will be shorter than previous surges.4 Cases are now falling in all regions of the UK, for example, and we expect more normal patterns activity to resume across Europe this winter.
A brighter outlook
We see three broad reasons the recovery will reaccelerate in 2022:
- Vaccinated individuals who become infected with Omicron display mild symptoms and hospitalisations are largely concentrated in the non-vaccinated share of the population.5
We believe that’s why governments are reluctant to reintroduce severe restrictions on the scale we experienced in 2020 and 2021. The Netherlands and Austria, which adopted country-wide lockdowns, did so for fairly short time spans. Most European countries limited restrictions to mask mandates and vaccination passes for indoor public spaces. UK restrictions, in particular, remained light compared to the preventive measures adopted by Germany, Italy, and France.
- We expect robust growth in personal consumption (PCE). In real terms (net of inflation), this is 6.1% for the Eurozone and 5.3% for the United Kingdom. We also look at nominal PCE, which includes the effect of inflation. Nominal PCE is expected to grow 9.7% in the United Kingdom and 8.6% in the Eurozone (Germany 10.5%, France 6.9%, Italy 9.1%.) These are quite elevated nominal levels that reflect both a robust recovery from 2021 as well as higher inflation.6
Table: Macroeconomic Forecasts for 2022 (Percent change, year average; data as January 12, 2022)7
- We see evidence of a significant well of pent-up demand from consumers, particularly in sectors most hampered by the pandemic, including travel, hospitality and entertainment events. Despite the emergence of Omicron, the service sectors in most nations continued to grow through December, adding to the likelihood of a rapid rebound. Purchasing Managers surveys registered 53.2 in the UK and 53.3 in the Eurozone, for example.8
All of this is reinforced by the scale of savings and liquidity in bank deposits that have swelled since the onset of the pandemic. Savings rates, or savings as a percentage of disposable income, now stand at 8.3% in the UK, compared to 5.7% at the outset of the pandemic, and 15% in the Eurozone, compared to 12.5% at the outset of the pandemic. Meanwhile, bank deposits in the Eurozone were on track to rise another 7% in 2021, after increasing 12.8% in 2020. This “dry powder” will support spending as Omicron recedes and the weather improves.9
Downside risks to our optimistic outlook fall into two categories: the likelihood inflation dents consumer purchasing power, and the degree to which policymakers effectively manage economic inclusion.
Inflation in the UK hit 5.4% in January, its highest level for nearly 30 years and slightly higher than the 5.1% registered in the Eurozone a month earlier – that being its highest reading since 1991. 10 The path of inflation is less clear in the UK, both due to the aftermath of Brexit and the fact price increases are more broad-based. For that reason, we expect inflation to ease over the course of the year to hit 4.4%. In the Eurozone, price increases are largely concentrated in food and energy, and should fall back to 2.5% over the course of the year.11
Improving societal and economic inclusion presents a more complex challenge. The pandemic exacerbated divisions along various lines, including income and earnings, distribution of savings by income, education attainment and job security, to name a few. Some deep scars from the pandemic will take several years to mend, and we expect policymakers to focus much of their efforts on this slow and painful healing process.
What to expect in the payments industry
The trends we discussed have broadly positive implications for the payments industry. As economies transition towards a new normal, we anticipate a recovery in face-to-face transactions, without any significant, offsetting drop in the level of payments volumes achieved by ecommerce. The pandemic was a catalyst for the technological transformation in the retail sector, and the new “omnichannel” realities in the physical and digital space will continue to shape the business for years to come.
A second critical area will be the return to travel, be it for business or leisure. It will take a few months to see the scaling back of border restrictions, and consumers may take some more time to rebuild the level of confidence that will prompt them to travel internationally. Nonetheless, the partial recovery we saw in 202112 bodes well for a broader rebound in international travel and cross-border transactions.
At a glance
- The health crisis is moving into a new phase. The public health impact of Omicron, though widespread, is manageable. Symptoms for vaccinated individuals appear generally mild and hospitalisations are mostly concentrated in the non-vaccinated share of the population.13 As a result, governments appear reluctant to reintroduce severe restrictions on the scale we experienced in 2020 and 2021.
- Pent-up demand hints at a consumer-led recovery. We continued to hear stories about significant pent-up demand, especially in the areas mostly affected by the Omicron surge: travel, hospitality (restaurants, pubs), attendance of entertainment events. Additionally, savings and liquidity accumulated in bank deposits since the onset of the pandemic remained largely untapped – this is the “dry powder” that we expect will support spending as omicron retreats and weather improves over the coming months.
- Downside risks remain, particularly inflation. Inflation remains a threat to our optimistic outlook. A surge in energy prices and COVID-related disruptions to supply chains are adding pressure to consumer prices and denting consumers’ purchasing power. We remain hopeful that the spike in inflation will prove temporary. This looks likely to be the case in the Eurozone and we may see the situation normalise by the spring as surges in energy prices subside. In the UK, the picture is complicated by the aftermath of Brexit and price increases seem to be rather broad-based through the economy, suggesting inflation will persist over the medium term.
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1 Visa Business Economics & Insights/Oxford Economics, as of January 12, 2022.
2 Google COVID-19 Community Mobility Report/Haver Analytics, as of January 12, 2022: https://www.google.com/covid19/mobility/
3 Visa Business Economics & Insights, as of January 12, 2022.
4 Business Economics & Insights/Oxford Economics, as of January 12, 2022.
5 World Health Organization Europe, Update on COVID-19: Omicron wave threatening to overcome health workforce, 11 January, 2022: https://www.euro.who.int/en/media-centre/sections/statements/2022/statement-update-on-covid-19-omicron-wave-threatening-to-overcome-health-workforce
6 Visa Business Economics & Insights/Oxford Economics, as of January 12, 2022: https://www.oxfordeconomics.com/forecasts-and-models/reports
7 Visa Business Economics & Insights/Oxford Economics, as of January 12, 2022: https://www.oxfordeconomics.com/forecasts-and-models/reports
8 IHS Markit/Haver Analytics, as of 12 January, 2022: https://ihsmarkit.com/research-analysis
9 ONS/Eurostat/Haver Analytics, as of 12 January, 2022: https://www.euro-area-statistics.org/banks-balance-sheet-deposits?cr=eur&lg=en
10 ONS/Eurostat/Haver Analytics, as of 12 January, 2022: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area
11 Visa Business Economics & Insights/Oxford Economics, as of January 12, 2022: https://www.oxfordeconomics.com/forecasts-and-models/reports
12 VISIT Visa International Travel database, Visa Business Economics & Insights, as of 12 January, 2022
13 World Health Organization Europe, Update on COVID-19: Omicron wave threatening to overcome health workforce, 11 January, 2022: https://www.euro.who.int/en/media-centre/sections/statements/2022/statement-update-on-covid-19-omicron-wave-threatening-to-overcome-health-workforce