06/10/10

By Claire West

•Consumers pessimistic about their financial future as confidence drops across Europe.

•Consumers still fear rises in the cost of living more than higher unemployment or higher taxes.

•Stark contrast in confidence between northern and southern Europe provides further weight to twin speed recovery argument

•Only 32% of respondents are saving

•Of those with borrowings, a third (30%) of Europeans still believe their borrowings are too high relative to income, and 22% say there are struggling to service the debts

Twelve months ago, consumers thought that the worst of the credit crunch was behind them but today their optimism seems misplaced as a fragile recovery from recession gives way to a new age of austerity, particularly in Southern Europe. Bearish sentiment dominates findings from the second annual Janus Capital Survey of European Consumer Finances as consumers predict a worsening of financial conditions and inflationary worries loom large.

This deterioration in financial confidence is reflected in Janus Capital Indicators of Financial Wellbeing (IFW)* which ranks countries according to an aggregate score based on attitudes towards financial security, savings and wealth, retirement, access to credit, and property.

Based on these criteria, the Netherlands ranks highest with an IFW score of +45 with the Spanish performing worst with an IFW score of minus 50. The 2010 rankings in full are:

1. Netherlands
2. Germany
3. UK
4. France
5. Italy
6. Spain

Most alarmingly, the underlying trend for “Financial Wellbeing” is down in almost all countries surveyed with only Germany bucking the trend to show a net gain in confidence. France suffered the greatest drop of 23 points, perhaps in part due to the effect of Sarkozy’s drastic programme of economic and social reforms including a proposed increase in retirement age.

Divided into the following five sections, the report revealed the following insights:

Financial security
Increased pessimism is evident across every section of the report with the majority of Europeans revising down their expectations for the next 12 months. 28% of households now expect to be worse off next year compared to 24% in 2009.

However, the picture varies hugely from country to country. More than half (55%) of Spanish households, for example, consider themselves financially worse off than a year ago. By contrast, only 29% and 28% of respondents in Germany and the Netherlands respectively believed they were worse off.

Within the “Financial Security” component, the Netherlands ranked first on the IFW, with Italy in last place and the UK placing third.

The return of inflation remains the issue preying most heavily on consumers’ minds (37%), ahead of concern around higher unemployment (19%), a fall in income (15%), or a rise in taxation (15%).

Savings and wealth
A significant proportion (16%) of respondents indicated that their income was insufficient to cover their current spending and needed to borrow money. In addition, almost half (49%) of respondents are just making ends meet and so not able to save. Fewer than a third (32%) of respondents are actually managing to save money. Risk aversion is endemic across Europe.

Retirement
There is more bad news on the retirement planning front too as Europeans retain their expectations of retiring at an average age of 63 without making adequate financial provision. Despite economic reforms by many European states, younger generations do not appear to have accepted the likelihood that they will need to work until a later age than their parents. Meanwhile, more than six in ten (61%) of Europeans believe they are not saving sufficiently for retirement.

Access to credit
More than a third (37%) of respondents indicated that they have borrowings on credit cards and/or unsecured loans (i.e. excluding mortgages). However, this represents a drop on last year’s levels, indicating that Europeans as a whole have been looking to reduce overall debt levels during the last 12 months. However, among those with borrowings, a third (30%) believe their borrowings are too high relative to income, while almost a quarter (22%) are having problems servicing their debt. Spanish households are under the greatest pressure with 43% struggling to meet loan commitments. At the other end of the scale a mere 3% of Dutch respondents are having difficulty making interest payments and only 7% feel their debt ratio is too high.

Lending conditions and access to credit vary enormously across countries. Spain appears to be one of the most difficult countries in which to get credit financing — 83% of those surveyed claimed it was either “hard” or “very hard” to get a loan, a slight improvement on last year’s figure of 87%. In contrast, in Germany 41% of respondents claimed it was easy to get a loan, compared to just 38% having difficulty. This suggests that the economic recovery across Europe could continue to be uneven.

Property
One glimmer of hope on the financial horizon comes from attitudes to property. Almost half (41%) of European consumers expect property prices to rise in the next 12 months, with only 17% predicting a fall.

44% of Europeans believe that it is a good time to buy property although this is down significantly from last year’s figure of 54% - reflecting the volatility of the property market in recent months. In this area The Netherlands ranked last on the IFW with Germany in first place.

Commenting on the findings, David Bowers of Absolute Strategy Research and one of the authors of the report said: “European consumers appear to have lost their optimism for a speedy recovery from recession, according to this year’s survey. Rather than the broad-based recovery that was hoped for, European household finances appear on an increasingly divergent trend.

“Interestingly, the Dutch continue to have the strongest household balance sheets but Germany is starting to catch up fast. In contrast, Spain and Italy with their significant economic problems have seen a further worsening of sentiment this year.”

Ric Van Weelden, Head of Janus Capital Group’s European business, added:

“The contrast between the relative prosperity of Northern European states compared to their southern neighbours makes the prospect of a twin track recovery ever more likely. However, consumers across all of Europe are more downbeat than ever about the immediate outlook.

“Despite this, it is inflation that weighs most heavily on consumers’ minds rather than concerns over employment and a drop in income.”