In Europe, cheaper goods help consumer but also pose risks

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Posted: Feb 18, 2015 9:24 AM
In Europe, cheaper goods help consumer but also pose risks

MILAN (AP) — In Milan's teeming commercial district, something unusual is happening this winter — Italians are shopping.

It's a big relief for store owners after a six-year decline in sales due to recession. Still, Renato Borghi, the president of the Italian fashion federation, is uneasy: shoppers, he notes, are relying on the seasonal discounts. If they start expecting lower prices, the industry is in for trouble.

"The Italian consumer is checking prices and waiting," said Borghi, whose organization represents some 130,000 retailers. "This is a tendency that is causing us concern."

Across Europe, companies are discounting to attract shoppers traumatized by years of recession and high unemployment. That's helping cash-strapped families and even giving retail sales and the economy a much-needed boost. Growth figures recently published for the fourth quarter were stronger than expected, in part thanks to higher spending.

Weak prices, however, are a double-edged sword.

They also carry the risk of deflation, when consumers start anticipating discounts and put off purchases in hopes of better bargains. If that becomes a habit, it can sink an economy for years. As prices drop, companies earn less, invest less and hold back on wages, making households even thriftier.

It's too early to tell if the region is sliding into deflation, economists say, but the risk is big enough that the European Central Bank unleashed a 1 trillion euro ($1.14 trillion) stimulus program last month for the 19-country eurozone.

The bank acted aggressively because once an economy is in deflation, it can be mighty hard to get it out. Japan has been in deflation for over two decades during which its economy has struggled to grow.

By last count, inflation in the eurozone was negative — with prices falling 0.6 percent annually in January. Even excluding the slump in energy costs, prices for other goods are falling or remain weak.

The key for Europe will be whether customers will be willing to pay higher prices in coming months.

The risks vary sharply from country to country.

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ITALY

Europe's third-largest economy is exhibit A when analysts warn of the risks of deflation in Europe.

It has the lowest level of inflation since the 1950s, when the country was still reeling from the devastation of World War II.

For now, that is helping spending. There was, for example, a better than expected 5 percent bump in sales in the first January weekend of the official sales season.

But retailers say that appetite for spending is low outside of the sales season.

"There's a psychological decline" in consumers' confidence, said Mario Ganassin, one of the owners of the family-run Sorelle Ramonda clothing chain based in Vicenza, in the north.

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FRANCE

France is alongside Italy considered one of the more fragile of Europe's large economies.

Its inflation is at the lowest since official records began 25 years ago, with prices falling outright, even when excluding energy costs.

But unlike most of the eurozone, France has yet to see that translate into higher spending. Retail sales have been falling steadily and sharply since last summer.

Mathieu Plane, an economist at the French Economic Observatory, says 2014 "seemed like the country's worst year since the beginning of the crisis in 2008." Indicators for 2015 are not showing any pick-up yet.

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SPAIN

Spain gives some reason for hope.

Though it has suffered a sharper economic downturn than Italy or France, it has also reformed its economy more and is now enjoying a recovery matched only by Germany.

Consumer prices have been falling in Spain since July, but unlike France, that has encouraged spending — it grew 2 percent last year and is expected to continue increasing this year. Spaniards are even once again buying bigger-ticket items like cars and appliances.

Experts say the main reason was a drop in unemployment from 25.7 percent at the start of 2014 to a still painful 23.7 percent.

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GERMANY

Europe's biggest economy is enjoying strong growth, and that seems to be tempering any real concerns of deflation.

Though consumer prices are down 0.5 percent annually, household spending rose strongly in the last three months of 2014. That's helped by the fall in energy costs. Figures for the North Rhine-Westphalia state, for example, show heating oil prices fell over 32 percent annually — significant relief for family budgets.

Germany also has a key advantage compared with many European states: low unemployment, which boosts consumer confidence.

It's likely not a coincidence that as people spent more on clothing, the prices for textiles stopped falling — a sign deflation is probably not taking root here.

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BRITAIN

Shop prices have fallen for 21 consecutive months in Britain, according to the main retail association.

Yet the country, which is not part of the eurozone but is a key trading partner, is not fretting about deflation risks as much as its European neighbors.

Like Germany, economic growth is relatively good, consumer confidence is on the rise and unemployment is falling.

As a result, the central bank expects the drop in inflation to be temporary and, on the whole, a positive for the economy.

"The outlook for consumer spending looks positive," said Helen Dickinson, director general of the British Retail Consortium. "Deflation doesn't always translate into bad news for retailers."

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Associated Press writers Jorge Sainz in Madrid, Danica Kirka in London, David McHugh in Frankfurt and Greg Keller in Paris contributed to this story.