Q-Series - Future Reimagined: How will the European consumer emerge from the COVID crisis?

The COVID-19 pandemic has triggered Europe's biggest economic contraction on record. One reason why the output loss has been so severe is that household consumption, which represents 54% of GDP and is usually quite stable across the business cycle, has suffered an exceptionally deep decline as a result of widespread mobility restrictions. In this report, we gather the insights of UBS economists, strategists and sector analysts (covering General Retail, Food & HPC, Beverages, Luxury Goods, Leisure, Airlines, Autos and Banks) to gauge the outlook for household consumption. We focus not just on the cyclical outlook, but also on structural changes post pandemic.

Our analysis points to an uneven recovery across Europe and crucial shifts in consumption patterns triggered by a greater focus on e-commerce and online shopping, health and ESG, as working from home and reduced business travel and commuting are likely to remain permanent features of the post-pandemic world. We attempt to identify the extent to which the developments we expect are priced in, and show how all these factors inform our preferred stock selections.

From a macro perspective, we are reasonably constructive on the outlook for household consumption. Specifically, we think that, after contracting by 7.9% in 2020, Eurozone real household consumption will grow 4.7% in 2021 and 4.8% in 2022 – moderately above consensus for 2021 (4.4%) and more significantly above consensus for 2022 (3.8%). As a result, (real) consumption would return to pre-crisis levels by Q2 2022; in nominal terms, this should happen by end-2021.

Despite a weak start to 2021, we expect a substantial relaxation of mobility restrictions as of Q2, along with progress on vaccinations, such that economic activity should face far fewer obstacles in Q3 and Q4 2021. This should facilitate a meaningful recovery in consumption, including from pent-up demand, despite lingering headwinds from higher unemployment and slowing wage growth. However, we expect clear differences across countries, with the recovery fastest in Germany, France and Switzerland, but slower in Italy, Spain and the UK.

The above notwithstanding, a host of other factors are also at play, both from a micro perspective and a longer-term structural perspective. The COVID crisis has triggered far reaching changes to the global economy, sometimes accelerating forces that were already underway before the crisis, sometimes unleashing new ones. UBS Research has covered these tectonic shifts to the global economy in a landmark Q-Series: Future Reimagined: Propelled to the Thinking Economy, identifying seven Megatrends, many of which affect consumer sectors: what we consume, how we consume, where we consume. We summarize how to identify businesses – across multiple industries – that will likely be most/least favoured by these Megatrends.