europe consumer overview · 4deb july 11, 2016 orah weinswig, managingdirector, fung global retail...

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DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

D E B O R A H W E I N S W I G M a n a g i n g D i r e c t o r ,

F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C H N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

• Europe is home to some of the world’s largesteconomies: Germany is a major exporter ofautomotiveandadvancedengineeringandtheUKisamajor financial center,whileFrance and Italy remainamongtheworld’stopeighteconomies.

• The economic recovery is continuing at a moderatepace inmost of Europe, helpedby a combinationofexternal and internal factors, including low oil andenergy prices, favorable monetary policies, andimprovedaccesstocredit.However,newthreatshaveemergedandolddangersmayreartheirheadsagain.

• TheUK’sdecisiontoleavetheEUisexpectedtohavea negative impact, at least in the short term, on theeconomies of the other main European countries,given their exposure to each other. Additional areasof concern include the unresolved structuralweaknessesofSouthernEuropeaneconomiesandthethreatofeurozonedisintegration.

• This report provides an overview of the economicperformance, demographics, consumer sentimentsand spending patterns of the top five Europeaneconomies—Germany, France, the UK, Italy andSpain—highlighting differences and the commonchallengesthatthesecountriesface.

Europe Consumer Overview

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TABLEOFCONTENTS

EXECUTIVESUMMARY........................................................................................................................3

GERMANY...........................................................................................................................................6

ECONOMY.............................................................................................................................................6

DEMOGRAPHICS.....................................................................................................................................7

CONSUMERSUMMARY.............................................................................................................................8

FRANCE.............................................................................................................................................11

ECONOMY...........................................................................................................................................11

DEMOGRAPHICS...................................................................................................................................12

CONSUMERSUMMARY...........................................................................................................................13

UK.....................................................................................................................................................15

ECONOMY...........................................................................................................................................15

DEMOGRAPHICS...................................................................................................................................17


ITALY................................................................................................................................................20

ECONOMY...........................................................................................................................................20

DEMOGRAPHICS...................................................................................................................................21


SPAIN................................................................................................................................................24

ECONOMY...........................................................................................................................................24

DEMOGRAPHICS...................................................................................................................................25


OUTLOOK:NEWUNCERTAINTYANDPERSISTINGTHREATS...............................................................28

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Europe Consumer Overview EXECUTIVESUMMARYDespite the rise of emerging markets, including China, India and Brazil,Europeisstillhometosomeoftheworld’s largesteconomies.Germany,amajor exporter of automotive and advanced engineering, is the world’sfourth-largesteconomy,aftertheUS,ChinaandJapan.TheUKisthefifth-largesteconomyintheworld,andLondonfightswithNewYorkforthetitleoftheworld’smainglobalfinancialcenter.FranceandItalyremainamongtheworld’stopeighteconomies.

Source:Shutterstock

The economic recovery continues at amoderate pace inmost of Europe,andgrowthof theEuropeanUnion’s (EU’s)GDPaccelerated from0.9% in2014to1.7%in2015.

A combination of favorable external and internal factors has beeninstrumentalinimprovingtheeconomiesofthelargestEuropeancountriesfollowing the period of uncertainty spurred by the 2008 global financialcrisis.Lowoilandenergyprices, lowinflationandinterestrates, improvedaccess to credit, and the implementation of policy measures to improvecompetitiveness have all helped to boost consumer spending and sustaintherecovery.

Nevertheless, Europe’s economies face threats. Most notably, the UK’sdecisionto leavetheEU is likely tohaveanegative impact,at least in theshort term. This impactwill affect not only the British economy, but alsothose of other EU countries, given the exposure that European countrieshavetoeachother.CitiforecaststhatEUandeurozoneGDPwillbef100–150basispointsloweroverthenextthreeyearsasaresultofBrexitthanitwouldhavebeenhadtheUKvotedtoremainintheEU.Thefirmforecaststhat UK GDPwill take a hit of 100–150 basis points in each of the years2016–2018—although, like many other banks, it does not forecast a UKrecession.

AcombinationoffavorableexternalandinternalfactorshasbeeninstrumentalinimprovingtheeconomiesofthelargestEuropeancountriesfollowingtheperiodofuncertaintyspurredbythe2008globalfinancialcrisis.

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Amoreprofound, though largely unmeasurable, threat to theEU is othermemberstates’heightenedcall for independence. InthewakeoftheUK’sdecision,pressuretoholdBrexit-stylereferendaappearstobegrowinginanumberofcountries, includingFrance, theNetherlands, ItalyandSweden.Fitch Ratings is among the organizations to have noted the increasedpoliticalriskthathangsovereconomicgrowthinEurope.

OtherthreatstoEurope’smaineconomiesincludethepossibilityofanothereurozonecrisistriggeredbycountrieswithveryhighgovernmentdebt,suchas Greece and Italy, defaulting and unresolved structural economicproblemsineconomiessuchasSpain,whichhasveryhighunemployment.Thebreakupoftheeurozoneandthefailureoftheeuroasacurrencyalsoremainpossibilities.

Source:Shutterstock

This report provides an overview of the economic performance,demographics, and consumer sentiment and spending patterns in the topfiveEuropeaneconomies:Germany,France,theUK,ItalyandSpain:

• Germany’s economy grew by 1.7% in 2015, driven by domesticdemand and a favorable labor market and financing conditions.Consumers in Germany are price sensitive and like to hunt fordeals, but they do not compromise on quality. Consumerconfidenceinthecountrywasontheriseinthefirstpartof2016.

• France’seconomygrewby1.2%in2015,supportedbylowenergyprices and the implementation of policymeasures that improvedcompetitiveness.Consumers inFrancetendtogive importancetoqualityandappearancewhenshopping.

• The UK has one of the most dynamic economies in Europe; thecountry’sGDPgrewby2.3%in2015.Anefficientandcompetitivelabor market, increased corporate profitability, and growingconsumerspendingsustainitseconomy.Britishconsumerstendtobe very well informed, attentive to factors such as quality, priceandtheenvironmentalimpactofwhattheybuy,andtheyareopen

OtherthreatstoEurope’smaineconomiesincludethepossibilityofanothereurozonecrisis.

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to novelties. The first half of 2016 saw a decline in consumerconfidenceduetouncertaintyaheadoftheBrexitreferendum.

• Italyisslowlyrecoveringfromaperiodofeconomicrecession.Thecountry’sGDPgrewweakly,by0.8%,in2015,sustainedbyfactorssuchaslowenergypricesandeasieraccesstocredit.ConsumersinItaly, traditionally sensitive to quality, have been forced by theuncertain economic environment to prioritize budget concerns.ConsumerconfidenceinItalydeclinedinthefirsthalfof2016duetoconcernoverthestrengthoftheeconomicrecovery.

• Spain is recovering quickly from a period of economic recession,and it showedthe fastestGDPgrowthamongthemainEuropeaneconomies in 2015, at 3.2%. Despite this, the recent period ofeconomic downturn prompted Spanish consumers to turn tocheaperproducts,anditcontinuestoaffectconsumerbehavior.Inearly 2016, consumer confidence deteriorated due to concernsoverthelong-termsustainabilityoftheeconomicrecoveryandthepersistence of unsolved structural problems, such as highunemployment.

Figure1.ComparisonofEconomicData:SelectedEUCountries,2015

Germany France UK Italy Spain

Population(Mil.) 81.2 66.4 64.9 60.8 46.4

GDP(€Bil.) €3,026 €2,181 €2,569 €1,636 €1,081

Per-CapitaGDP(€) €37,266 €32,840 €39,598 €26,916 €23,277

GDPGrowthRate(YoY%Change) 1.7% 1.2% 2.3% 0.8% 3.2%

ConsumerPriceInflation 0.1% 0.1% 0.0% 0.1% (0.6)%

HouseholdDisposableIncome(€,2014) €26,291 €23,451 €21,312 €19,903 €17,711

UnemploymentRate 4.6% 10.4% 5.3% 11.9% 22.1%

BalanceofTrade(€Mil.) €257.1 €(0.9) €(132.6) €35.8 €15.2

GovernmentDebttoGDP(Dec.2015) 71.2% 96.1% 89.2% 132.7% 99.2%

EaseofDoingBusinessRanking 15 27 6 45 33Non-EUImportTariffRate,Average,AllProducts(2014) 2.1% 2.1% 2.1% 2.1% 2.1%

StandardVATRate 19% 20% 20% 22% 21%

RetailSalesGrowth(YoY%Change) 3.1% 1.2% 2.0% 1.8% 3.6%

E-CommerceSales(€Bil.) €56 €38 €90 €12 €14E-CommerceSalesGrowth(YoY%Change) 12.0% 11.1% 14.5% 19.0% 13.9%Source:Eurostat/Destatis/INSEE/OfficeforNationalStatistics(ONS)/OECD/TradingEconomics/WorldBank/EuropeanCommission/eMarketer/FungGlobalRetail&Technology

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GERMANY

Figure2.GermanyCountryData,2015

Population(Mil.) 81.2

GDP(€Bil.) €3,026

GDPGrowthRate(YoY%Change) 1.7%

UnemploymentRate 4.6%

ConsumerSpending(YoY%Change) 2.5%

ConsumerPriceInflation 0.1%

Source: Eurostat/OECD/Trading Economics/World Bank/European Commission/eMarketer/FungGlobalRetail&Technology

Economy

Germany,Europe’s largesteconomyandthefifth largest intheworld,basedits success in recent years on the export of high-added-value products.Germany is thesecond-largestexporterglobally,withexportsaccounting formore than one-third of its GDP. China and the US are Germany’s mostimportanttradingpartnersoutsidetheEU.

Themanufacturing sector accounted for 30.2%ofGermanGDP in 2015 andemployed 24.6% of the workforce. Major manufacturing industries includeautomotive,advancedengineering,chemicalsandpharmaceuticals.

Source:Shutterstock

The service sector is the largest sector within the German economy,accounting for 69.1% of its GDP in 2015 and employing 73.8% of the laborforce.Retailinggenerated€594.3billionin2015andgrewby3.1%,accordingto our analysis of data from the German statistical office Destatis. E-commercegrewby12%in2015,toatotalretailvalueof€56billion,accordingto eMarketer. Germany is home to large Internet retailers, including OttoGroup, Zalando and Media Markt. Agriculture accounted for the remaining0.7%oftheeconomyin2015.

GermanyisEurope’slargesteconomyandtheworld’sfifthlargest.TheGermaneconomygrewby1.7%in2015,drivenbyafavorablelabormarket,favorablefinancingconditions,lowenergypricesandhighnetmigration.

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TheGermaneconomygrewby1.7%in2015andisexpectedtogrowby1.6%thisyear,accordingtotheEuropeanCommission.Growthwillbeunderpinnedbyafavorablelabormarketandfavorablefinancingconditionsaswellasbytemporaryfactorssuchaslowenergypricesandhighnetmigration.

However, the UK’s exit from the EU could have a negative impact on theGermaneconomy.Germany’sexportsofgoodstotheUKaccountedfor2.4%of the country’s GDP in 2014, according to Citi, and a restoration of tradebarrierscoulddentthatfigure.Financialexposureisanotherconcern.Germanbanks’ assets in the UK accounted for 13% of total German GDP in 2013,accordingtoCiti,andany largesterlingdepreciationcould leadtosignificantlosses for German financial institutions. The consolation is that the UK’sdeparturefromtheEUislikelytobeacoupleofyearsaway.

Other factors that could weigh on the German economy include anothereurozone crisis caused by a default of Greece or other Southern Europeaneconomies and low public and corporate investment relative to precrisislevels,accordingtotheEuropeanCommission.TheslowdownoftheChineseeconomy is another risk to Germany’s economic growth in 2016, given theexposure that Germany’s exports have to the world’s second-largesteconomy.

Figure3.Germany:GDPGrowth(YoY%Change)

Source:WorldBank/EuropeanCommission/FungGlobalRetail&Technology

Demographics

In terms of population, Germany is the most populous country in Europe(excludingRussia),withatotalpopulationof81.2millionin2015.Berlin,thecapital, isalso thecountry’s largestcity,andhasapopulationof3.6million.Othermainurbanconglomerates includeHamburg(1.8million),Munich(1.4million)andCologne (1.0million), and75.3%of the totalpopulation lives inurbanareas.

Germanyhasanagingpopulation,withlowgrowthrates.TheWorldFactbook,publishedbytheCIA,estimatesthatthemedianageinGermanywas46.5in

3.7

0.4 0.3

1.6 1.7 1.6

2011 2012 2013 2014 2015 2016E

TheUK’sexitfromtheEUcouldhaveanegativeimpactontheGermaneconomy.

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2015. The population declined by 1.5% in 2014, but returned to growth, of0.5%,in2015,accordingtoEurostat.However,thiswasaprojectionbasedondatafromthe2011census,andfewcouldhavepredictedthemassmigrationintoGermanythatoccurredin2015:anet1.14millionforeignersmigratedtothecountrylastyear,equivalenttoa1.4%increaseinpopulation.Totalforeignimmigrationamountedtojustunder2millionin2015,before860,000foreignemigrants are discounted. Germany is a multicultural country with largeforeign communities. Immigrants fromTurkeymakeup2.4%of theGermanpopulation and immigrants from Southern and Eastern European countriesalsocompriseasignificantportionofthepopulation.

ConsumerSummary

Price and quality are the main factors German consumers consider whenshopping,accordingtomarketing insightproviderBrandView.Consumers inGermanyliketocomparepricesandtheytendtoshoparoundtofindthebestdeals.ThepopularityofdiscountersinthecountryconfirmsGermanshoppers’price sensitivity. But quality is also important to them. Hence, Germanconsumershaveahighly rationalapproach toshopping,and they try to findthebest-qualityproductatthelowestpricepoint.

Germany is a country in which low-paid employment has flourished. Labormarket reforms in the early to mid-2000s fed a low-wage culture, and thecountrylackedaminimumwageuntil2015,whichcompoundedthis.Aboominlow-wagejobsdroveupemploymentrates,butleftmanyworkerswithlittlediscretionaryincome,resultinginsubduedgrowthinconsumerdemand.

Source:Shutterstock

Germany’s position at the heart of Europe means consumer confidence isoftentiedtomajorcontinentaldevelopments:inlater2014,forinstance,afallinconsumersentimentcoincidedwiththeGreekcrisis.Consumerconfidencerecoveredinthefirstpartof2015,butdeclinedinthelaterpartoftheyearasthemigrationcrisistookhold.Thescaleofmigrationhitconsumerconfidencehard and resulted in a political backlash that was evident in spring 2016elections.Themetricimprovedinthefirstfewmonthsof2016.InJune2016,

PriceandqualityarethemainfactorsGermanconsumersconsiderwhenshopping.

Theshort-termoutlookforasustainedrecoveryinconsumerconfidenceisnotgood.

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theindicatorwasat(1.9),itshighestlevelsinceAugust2015.

Yettheshort-termoutlookforasustainedrecoveryinconsumerconfidenceisnotgood.AnyresurgenceofeconomicdifficultiesinGreecewouldcompoundnegative consumer sentiment; meanwhile, the economic ramifications ofBrexitarelikelytoweighonsentiment.

Figure4.Germany:ConsumerConfidenceIndicator

Source:Eurostat

Figure5.Germany:ConsumptionExpenditurebyCategoryas%ofTotalExpenditure,2015

Food,BeveragesandTobacco 13.5

TransportandCommunications 16.8

Housing 24.0

ClothingandFootwear 4.9

Furniture 6.7

RecreationandCulture 9.5

HotelsandRestaurants 5.5

Others 19.1

Source:Eurostat/Destatis/FungGlobalRetail&Technology

(1.9)

(8)

(6)

(4)

(2)

0

2

4

6

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Figure6.Germany:TotalConsumerSpending(€Bil.)

Source:Eurostat/TradingEconomics/FungGlobalRetail&Technology

Figure7.Germany:Per-CapitaConsumerSpending(€)


Figure8.Germany:MostValuableBrands,2015(€Mil.)

BMW 27,241

DeutscheTelekom 25,618

Volkswagen 25,549

Mercedes-Benz 22,505

Allianz 17,242

Source:BrandFinance

1,418.5

1,451.0

1,475.5

1,502.2

1,539.5

1,567.2

2011 2012 2013 2014 2015 2016E

17,351.5

17,728.717,989.5

18,599.4

18,959.7

19,381.4

2011 2012 2013 2014 2015 2016E

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FRANCE

Figure9.FranceCountryData,2015


GDP(€Bil.) €2,181






Economy

France is the seventh-largest economy in theworld and the third largest inEurope.Thegovernmentmaintainsastrongpresence insectors that includepower, defense and public transport. With more than 84 million foreigntourists per year, according to the CIA’s TheWorld Factbook, France is themost-visited country in theworld, with a total expenditure by internationalinboundtouristsof€50.3billionin2014(latestavailable).

The manufacturing sector accounted for 19.3% of French GDP in 2015 andemployed 21.3% of the workforce. Major manufacturing industries includemachinery, chemicals, automobiles, metallurgy, aircraft, electronics, textilesandfoodprocessing.

Source:Shutterstock

TheservicesectoristhelargestsectorwithintheFrencheconomy,accountingfor79.0%ofitsGDPin2015andemploying75.7%ofthelaborforce.Retailinggenerated€493.3billionin2015andgrewby1.2%,accordingtoouranalysisofdatafromtheFrenchstatisticalofficeINSEE.E-commercegrewby11.1%in

Followingthreeyearsofweakgrowth,FrenchGDPgrewby1.2%in2015,supportedbyreducedoilprices,aweakeuroandtheimplementationofpolicymeasurestoreducethecostoflaborandimprovecompetitiveness.

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2015,toatotalretailvalueof€38billion,accordingtoeMarketer.Agricultureaccountedfortheremaining1.7%oftheeconomyin2015.

Following three years of weak growth, French GDP grew by 1.2% in 2015,supported by reduced oil prices, a weak euro and the implementation ofpolicymeasurestoreducethecostoflaborandimprovecompetitiveness.

The European Commission expects the French economy to grow by 1.3% in2016,sustainedbyprivateconsumption,asinflationissettoremainlowandboost households’ purchasing power. Low investment and export levels areexpectedtocontinuetoinhibitgrowth.

The UK’s eventual exit from the EU could have a negative impact on theFrencheconomy.ExportsofgoodstotheUKaccountedfor1.4%ofFrance’sGDP in 2014, according to Citi, and a restoration of trade barriers couldnegativelyaffectexportation.Financialexposureisanotherconcern,asFrenchbanks’ assets in the UK accounted for 10% of the country’s GDP in 2013,according to Citi. Any large sterling depreciation could lead to significantlossesforFrenchfinancialinstitutions.

Other factors that could weigh on the French economy include anothereurozone crisis caused by the default of Greece or other peripheral EUeconomies.

Figure10.France:GDPGrowth(YoY%Change)


Demographics

France’s population totaled 66.4million in 2015. The capital, Paris, is by farthe largest city in France, with a population of 10.8 million. Other urbanconglomeratesincludeLyon(1.6million),Marseille(1.6million)andLille(1.0million),and79.5%ofthetotalpopulationlivesinurbanareas.

TheFrenchpopulationgrewby0.4% in2015,andthemedianagewas41.1,according to theTheWorld Factbook. The agingpopulation is a concern forFrance,butalesssevereonethanforotherEuropeancountriessuchasItalyand Germany. French law prohibits the collection of data on ethnicity and

2.1

0.2

0.7

0.2

1.21.3

2011 2012 2013 2014 2015 2016E

Lowinvestmentandexportlevelsareexpectedtocontinuetoinhibitgrowth.

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religious affiliation, so official statistics on them are unavailable. However,given France’s colonial past, it is a multicultural country with largecommunitiesfromvariousregionsaroundtheworld,includingNorthAfrica.

ConsumerSummary

French consumersare relatively affluentand impulsive. Theymake frequentpurchasesand like to trynewproductsandservices,according toSantanderBank. Quality is the main factor that French consumers take into accountwhen decidingwhat to buy: a growing number of consumers tend to favorproducts with a quality label or brand, according to the bank’s research.Frenchconsumersalsovalueafter-salesservicewhendecidingwheretobuy.According to Agriculture and Agri-Food Canada, French consumers preferdomestic products to imported goods and are increasingly concerned aboutthe impact of what they eat and buy on their own health and on theenvironment.

ConsumerconfidenceremainedlowinFrance in2015.January2016showedan improvement,butwas followedbyadecline that lasted throughApril. InMay,theconfidencereadingwas(10.1),thehighestsinceJanuary2015.

Figure11.France:ConsumerConfidenceIndicator

Source:Eurostat

(10.1)

(25)

(20)

(15)

(10)

(5)

0

Frenchconsumersarerelativelyaffluentandimpulsive.Theymakefrequentpurchasesandliketotrynewproductsandservices.

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Figure12.France:ConsumptionExpenditurebyCategoryas%ofTotalExpenditure,2013

FoodandNonalcoholicBeverages 13.4

Transport 13.0

Housing 26.7


Furniture 1.4



Others 26.6

2013dataarethelatestavailable.

Source:Eurostat/INSEE/FungGlobalRetail&Technology

Figure13.France:TotalConsumerSpending(€Bil.)

Source:Eurostat/FungGlobalRetail&Technology

1,114.0

1,128.7

1,136.8 1,139.0

1,158.4

1,168.1

2011 2012 2013 2014 2015 2016E

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Figure14.France:Per-CapitaConsumerSpending(€)


Figure15.France:MostValuableBrands,2016(€Mil.)

Orange 17,569

AXA 16,818

BNPParibas 14,289

Total 13,559

L’OréalParis 12,602

Source:BrandFinance

UK

Figure16.UKCountryData,2015


GDP(€Bil.) €2,569






Economy

The UK, one of the world’s leading financial centers, is the second-largesteconomy in Europe after Germany. The global financial crisis hit the Britisheconomy hard in 2008, given its reliance on the financial sector. However,since then, the economy has recovered rapidly and has become one of themostdynamicwithintheEU.

17,143.4

17,291.517,328.4

17,286.3

17,442.5

17,518.6

2011 2012 2013 2014 2015 2016E

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The manufacturing sector accounted for 19.7% of British GDP in 2015 andemployed 15.2% of the workforce. Major manufacturing industries includemachine tools, electric power equipment, automation equipment, railroadequipment, shipbuilding, aircraft, motor vehicles and parts, electronics andcommunications equipment, metals, chemicals, coal, petroleum, paper andpaperproducts,foodprocessing,textiles,clothing,andotherconsumergoods.

TheservicesectoristhelargestsectorwithintheUKeconomy,accountingfor79.6% of GDP in 2015 and employing 83.5% of the labor force. Retailinggenerated€468.3billionin2015andgrewby2.0%inlocalcurrency,accordingtotheONS.TheUKhasthebiggeste-commercechannelinEurope,accordingtoeMarketer,andoneofthemostdynamic;UKe-commercegrewby14.5%in2015 toa total valueof€90billion.Agricultureaccounted for the remaining0.6%oftheeconomyin2015.

Source:Shutterstock

TheUKeconomygrewby2.3%in2015.Thestrongperformancewasdrivenbyinternal factors that included an accommodative monetary policy, theresilience of the banking sector, an efficient and competitive labor market,increasedcorporateprofitability,androbustgrowthinconsumerexpenditureduetolowunemploymentandlowinflation.TheUKeconomyisexpectedtogrow by 1.8% in 2016, according to a forecast the European CommissioncompiledbeforetheBrexitreferendum.

However, the UK’s decision to leave the EU is expected to have a negativeimpact on the economy in the short term, largely due to the uncertaintysurroundingtheparticularsoftheeventualseparation.Thereisdisagreementamongeconomistsastothenear-termeconomicimpactoftheBrexitvote:

• Credit Suisse andBarclays haveboth forecast a recession in the secondhalfof2016.Barclaysexpectspositiveeconomicgrowthtoreturnin2017,butCreditSuisseforecaststhattherecessionwillcontinueintonextyear.

• J.P.MorganandresearchconsultancyCapitalEconomicsdonotforeseearecessionlaterthisyearorin2017.

Prior to the referendum,Citi forecast thatanexit fromtheEUwouldhitUKGDP growth by 150 basis points in 2017 and again by the same amount in2018.ING’sforecastwasslightlylesspessimistic;thefirmforecasta120-basis-

TheUKeconomygrewby2.3%in2015.Thestrongperformancewasdrivenbyanaccommodativemonetarypolicy,theresilienceofthebankingsector,anefficientandcompetitivelabormarket,increasedcorporateprofitability,andgrowingconsumerexpenditureduetolowunemploymentandlowinflation.

J.P.MorganandresearchconsultancyCapitalEconomicsdonotforeseearecessionlaterthisyearorin2017.

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point impact in 2017, easing to a 70-basis-point hit in 2018. Both expecteconomicgrowthtoremainpositivein2017and2018.

Figure17.UK:GDPGrowth(YoY%Change)


Demographics

TheUKhadatotalpopulationof64.9millionin2015.Thecapital,London,isbyfarthelargestcityintheUK,withapopulationof10.3million.OtherlargemetropolitanareasincludeManchester(2.6million),Birmingham(2.5million)and Glasgow (1.2million), and 82.6% of the total population lives in urbanareas.

TheBritishpopulationgrewby0.5% in2015,and themedianagewas40.4,according to the TheWorld Factbook. The country’s economic performanceand strong labor market have attracted immigrants from other Europeancountries in recent years, and the UK is also home to more traditionalimmigrant communities from former Commonwealth countries. Due to itscolonial past, the UK is an ethnically diverse country, with large ethnicminoritygroups.

ConsumerSummary

ThedynamismoftheBritisheconomyisreflectedinitsconsumers’behavior.Consumer spending grew faster in the UK in 2015 than it did in any othermajor European country, fostered by high employment and good economicprospects.UK consumers tend towork long hours and therefore appreciateinnovativewaystoshopefficiently.IntheUK,theInternetretailchannelisthemost advanced in Europe and one of themost advanced in theworld. Therecent success of companies such asDeliveroo—adigital startup that offersrestaurant food delivery—shows that time-strapped British consumers inurbanareasareconfidentinbuyingservicesonline.

Seeking value for money has become a key element of British consumers’shoppingbehavior,according toBarclays,whichcites the riseofdiscounters

2.0

1.2

2.2

2.9

2.3

1.8

2011 2012 2013 2014 2015 2016E

ConsumerspendinggrewfasterintheUKin2015thanitdidinanyothermajorEuropeancountry,fosteredbyhighemploymentandgoodeconomicprospects.

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as evidence of this trend. Quality, superior design, branding andenvironmental benefits are also factors that UK consumers consider whenshopping, according to Santander. After-sales service is important, too.According tomarket research firmMintel, 79%ofUK shoppers claim that acompany’sreturnpolicyinfluencestheirpurchasedecision.

ConsumerconfidenceintheUKreachedits2015peakinJunelastyear,withascoreof5.9. Thiswas followedbyadownward trendduring the summerof2015, probably due to concerns about the migration crisis in Europe. Theindicator deteriorated again at the start of this year, dropping from 2.8 inDecember 2015 to (1.4) in May 2016. Despite upbeat economic headlinesaboutlowinflationandlowinterestrates,uncertaintyovertheoutcomeandpotential impact of the Brexit referendummay haveweighed on consumerconfidenceinthefirstmonthsof2016.

Figure18.UK:ConsumerConfidenceIndicator

Source:Eurostat

Figure19.UK:ConsumptionExpenditurebyCategoryas%ofTotalExpenditure,2015


Transport 14.1

Housing 24.5


Furniture 1.6



Others 25.8


(1.4)

(2)

(1)

0

1

2

3

4

5

6

7

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Figure20.UK:TotalConsumerSpending(€Bil.)


Figure21.UK:Per-CapitaConsumerSpending(€)


Figure22.UK:MostValuableBrands,2015(€Mil.)

Vodafone 22,471

HSBC 22,465

BT 13,320

BP 12,141

Barclays 11,699

Source:BrandFinance

1,128.81,256.5 1,252.6

1,376.9

1,571.21,634.8

2011 2012 2013 2014 2015 2016E

17,911.219,788.2 19,600.7

21,396.0

24,218.4 25,036.0

2011 2012 2013 2014 2015 2016E

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ITALY

Figure23.ItalyCountryData,2015


GDP(€Bil.) €1,636






Economy

Italyisthefourth-largesteconomyinEurope.TheItalianeconomyisdriveninlarge part by themanufacture of high-quality consumer goods by small andmedium-size firms. The structure and performance of the economy differssignificantlybetweenthedevelopednorthernregion,whichhasstrongprivatemanufacturing and service sectors, and the less developed and moreinefficientsouthernregion,whichsuffersfromhighunemploymentandhasasizeableundergroundeconomy.

The manufacturing sector accounted for 23.6% of Italian GDP in 2015 andemployed 28.3% of the workforce. Major manufacturing industries includemachinery,ironandsteel,chemicals,foodprocessing,textiles,motorvehicles,clothing,footwear,andceramics.

TheservicesectoristhelargestsectorwithintheItalianeconomy,accountingfor74.2%ofGDPin2015andemploying67.8%ofthelaborforce.Retailsalesgrewby1.8%in2015,accordingtodatapublishedbyEurostat.E-commerceinItalygrewby19.0%in2015,toatotalretailvalueof€12billion,accordingtoeMarketer. In 2015, agriculture accounted for the remaining 2.2% of theeconomy.

After three years of recession, Italy’s economy returned toweak growth, of0.8%, in 2015. Positive growth was sustained by improved consumerconfidence, better labormarket prospects, low energy and oil prices, and agraduallooseningoffinancialconditionsfortheprivatesector.Therecoveryisset to strengthen in 2016, with growth of 1.1% forecast by the EuropeanCommission.

The UK’s departure from the EU should have relatively little impact on theItalian economy. Italy’s exports of goods to the UK were just 1.1% of thecountry’s GDP in 2014, according to Citi. Also, Italian banks havemuch lessfinancialexposuretotheUKthanGermanandFrenchbanksdo:Italianbanks’assetsintheUKaccountedforlessthan5%ofthecountry’stotalGDPin2013,accordingtoCiti.

TheItalianeconomycouldbenegativelyimpactedbyanothereurozonecrisiscausedbyadefaultofoneoftheSouthernEuropeanEUeconomies.Italyhada 132.7% debt–to-GDP ratio in 2015, according to data from the EuropeanCommission,andcoulditselfdefaultonitsdebt.

Afterthreeyearsofrecession,Italy’seconomyreturnedtoweakgrowth,of0.8%,in2015.Thepositivegrowthwassustainedbyimprovedconsumerconfidence,betterlabormarketprospects,lowenergyandoilprices,andagraduallooseningoffinancialconditionsfortheprivatesector.

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Figure24.Italy:GDPGrowth(YoY%Change)


Demographics

Italyhadatotalpopulationof60.8millionin2015.Thecapital,Rome,isalsothecountry’slargestcity,withapopulationof3.7million.Othermajorurbanconglomerates includeMilan(3.0million),Naples(2.2million)andTurin(1.8million),and69.0%ofthetotalpopulationlivesinurbanareas.

Thepopulation in Italygrewby0.3% in2015,andthemedianagewas44.8,accordingtotheTheWorldFactbook.SimilartoGermany,thecountrysuffersfromslowpopulationgrowthandanagingofthepopulation,factorsthathavebeenpartiallymitigatedbyimmigrationinrecentyears.

ConsumerSummary

Italian consumers traditionally favored quality over price, but the recenteconomic recession hit consumer spending and forced more people toprioritize budgetary concernswhen shopping. In 2015, the better economicoutlook and a return to growth—however weak—of the country’s GDPrestoredconfidence.

According to market research firm Euromonitor International, Italianconsumers tend to look for locally sourcedproducts and are less concernedabout labels such as “organic”when choosing groceries. Italians also like tobuynewproducts,especiallyinapparel,accordingtoSantander.

0.6

(2.8)

(1.7)

(0.4)

0.81.1

2011 2012 2013 2014 2015 2016E

ConsumerconfidenceinItalydeclinedinthefirsthalfof2016asconsumersbecameconcernedaboutthestrengthoftheeconomicrecovery.

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Source:Shutterstock

ConsumerconfidenceinItalyroseinthefirstthreemonthsof2015andagainduringthesecondhalfof2015asaresultofanimprovedeconomicoutlook,butitdeclinedinthefirsthalfof2016asconsumersbecameconcernedaboutthestrengthoftheeconomicrecovery.

Figure25.Italy:ConsumerConfidenceIndicator

Source:Eurostat

Figure 26. Italy: Consumption Expenditure by Category as % of Total Expenditure,2014


Transport 12.0

Housing 24.4


Furniture 2.1



Others 24.9


(7.0)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

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Figure27.Italy:TotalConsumerSpending(€Bil.)


Figure28.Italy:Per-CapitaConsumerSpending(€)


Figure29.Italy:MostValuableBrands,2016(€Mil.)

GeneraliGroup 9,233

Eni 8,257

Enel 7,253

TelecomItaliaGroup 5,718

IntesaSanpaoloGroup 5,040

Source:BrandFinance

1,014.2

1,002.4

987.8

994.5

1,014.4

1,028.3

2011 2012 2013 2014 2015 2016E

17,083.8

16,877.4

16,550.5

16,361.3

16,685.8

16,780.2

2011 2012 2013 2014 2015 2016E

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SPAIN

Figure30.SpainCountryData,2015


GDP(€Bil.) €1,081




ConsumerPriceInflation (0.6)%


Economy

Spain is the fifth-largest economy in Europe (excluding Russia). The countryhas a strong and diverse manufacturing industry and is one of the biggesttouristdestinationsintheworld.However, in2008,followingtheburstingoftheSpanishhousingmarketbubble,thecountryplungedintorecession,anditonly started to recover in 2014. High unemployment remains a concern forthecountry.

Source:Shutterstock

Themanufacturing sector accounted for 22.7% of SpanishGDP in 2015 andemployed 15% of the workforce. Major manufacturing industries includetextiles and apparel, food and beverages, metals and metal manufactures,chemicals, shipbuilding, automobiles, machine tools, clay and refractoryproducts, footwear, pharmaceuticals, and medical equipment The Spanisheconomy also has a relatively large agriculture sector, which accounted for2.5%ofitstotalGDPin2015.

The service sector is the largest sector within the Spanish economy,accounting for 74.8% of its GDP in 2015 and employing 58.4% of the laborforce. Retail sales grew by 3.6% in 2015, according to data published by

SpanishGDPexpandedby3.2%in2015,thefastestgrowthamongthemajorEuropeaneconomies.

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Eurostat.E-commerceinSpaingrewby13.9%in2015,toatotalretailvalueof€14billion,accordingtoeMarketer.

SpanishGDPexpandedby3.2%in2015,thefastestgrowthamongthemajorEuropeaneconomies.Thegrowthwasdrivenbyimprovedaccesstocreditforfirms and households, enhanced consumer confidence, and other, externalfactors, including lowoilandenergypricesand the relativeweaknessof theeuro against other major currencies, which boosted exports. Growth isexpectedtoremainrobust in2016;theEuropeanCommissionforecastsGDPgrowth of 2.6% this year. Private consumption and investment shouldcontinuetoencouragegrowth.

As with other European markets, the UK’s exit from the EU may have anegative impactontheeconomy inSpain.Thecountry’sexportsofgoodstotheUKwere1.5%ofGDPin2014,accordingtoCiti,andarestorationoftradebarrierscoulddamagethatfigure.Moreover,asamaintouristdestinationforBritishholidaymakers, Spain runsamajor service trade surpluswith theUK,andadeclineinthepoundcouldhittourism.AnycurtailingofBritishcitizens’freedomofmovementwithintheEUcouldalsohittheSpanishtourismsector.

Financial exposure is another concern. Spanish banks’ assets in the UKaccounted for37%of thecountry’s totalGDP in2013,according toCiti.Thepercentage is one of the highest in Europe (along with Ireland’s), and asterlingdepreciationcouldimpactSpanishfinancialinstitutions.

Other factors that could drag on the Spanish economy include anothereurozone crisis caused by a default of Greece or other economies in thecurrencyunion.Spain itself remainsaconcern for theEU,given itsunsolvedstructuralproblems, includingveryhighunemployment,whichwas22.1% in2015,accordingtoEurostat.

Figure31.Spain:GDPGrowth(YoY%Change)


Demographics

Spain had a total population of 46.4million in 2015. The capital,Madrid, is

(1.0)

(2.6)

(1.7)

1.4

3.2

2.6

2011 2012 2013 2014 2015 2016E

SpainremainsaconcernfortheEU,givenitsunsolvedstructuralproblems,includingveryhighunemployment,whichwas22.1%in2015,accordingtoEurostat.

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alsothecountry’slargestcity,withapopulationof6.2million.Theotherlargeurbanarea isBarcelona,withapopulationof5.3million.Some79.6%ofthetotalpopulationlivesinurbanareas.

Thepopulation in Spain grewby0.9% in2015, and themedianagewas42,according to the TheWorld Factbook.While Castilian Spanish is the officiallanguage, a sizeable part of the population also speaks regional languages,suchasCatalan,whichisspokenby17%ofthepopulation.

ConsumerSummary

Despite the economic recovery that began in 2014, Spanish consumerbehaviorisstillbeingaffectedbytheprolongedperiodofeconomicrecessionthat started in 2007–2008. Traditionally, Spanish consumers demandedquality, but, following the deterioration of purchasing power during therecession,manyconsumersturnedtocheapproductsthattheyhadpreviouslyavoided—and price has become a crucial factor in informing shoppingdecisions.

Source:Shutterstock

According to Santander, because of price concerns, Spanish consumers areattaching less and less importance to brands, but they remain conservativeand prefer known products to new ones. Spanish consumers also tend toprefer domestic products, but they do not givemuch importance to factorssuch aswhether foods are organically grown or how the products they buyaffecttheenvironment.

Consumerconfidence inSpain showedanoverall growth trendduring2015,with a peak in December. However, confidence declined steeply during thefirsthalfof2016,from4.8inDecember2015to(5.5)inMarch2016.Despitethe strong economic growth in Spain in 2015, consumers remain concernedabout the long-termeconomicoutlook,as theeconomyremainsaffectedbyunresolvedstructuralproblems,includinghighunemployment.

Duringthefirsthalfof2016,Spanishconsumersremainedconcernedaboutthelong-termeconomicoutlook,astheeconomyisstillaffectedbyunresolvedstructuralproblems,includinghighunemployment.

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Figure32.Spain:ConsumerConfidenceIndicator

Source:Eurostat

Figure33. Spain: Consumption Expenditure by Category as% of Total Expenditure,2014


Transport 11.5

Housing 23.8


Furniture 0.8



Others 25.2


Figure34.Spain:TotalConsumerSpending(€Bil.)


(3.6)

(8)

(6)

(4)

(2)

0

2

4

6

634.3

627.6

616.0

624.6

640.2

665.8

2011 2012 2013 2014 2015 2016E

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Figure35.Spain:Per-CapitaConsumerSpending(€)


Figure36.Spain:MostValuableBrands,2014(€Mil.)

Santander 14,522

Movistar 9,340

BBVA 6,189

Zara 5,307

Iberdrola 4,142

Source:BrandFinance

OUTLOOK:NEWUNCERTAINTYANDPERSISTINGTHREATSBasedonforecaststhatweredrawnupbeforetheUKvotedtoleavetheEU,theeconomicoutlookremainspositiveforEuropeinthenextfewyears.TheEuropean Commission forecast GDP growth of 1.6% and 1.8% in 2016 and2017,respectively,forthe28EUcountriesinaggregate.Factorsincludinglowinflation,enhancedaccesstocreditandlowfuelpricesshouldhelpunderpinconsumerconfidenceand,inturn,spending.

However, there were signs of discomfort in consumer confidence readingsduringthefirsthalfof2016,particularlyinItalyandSpain,whereconsumersarewonderingwhethertheeconomicrecoveryisheretostayorifitisjusttheresultoffavorableconditionsthatmightchangeinthenearfuture.Toalesserextent, concerns also exist in Germany and France, where reliance ontemporaryconditions—suchaslowoilandenergypricesboostingexportsandlow inflation encouraging domestic demand—has hidden a number ofproblems.TheseincludelowpublicandcorporateinvestmentinGermanyandan uncompetitive labormarket in France, and they have been only partiallyaddressed.

The impact of Brexit will be the principal near-term drag on EU economicgrowth. For the UK, major hits in the near future are likely to come fromweaker business investment and the sterling’s depreciation; the effect onconsumerconfidencehasyettobemeasured.

13,593.1

13,405.7

13,182.2

13,429.0

13,782.4

14,345.1

2011 2012 2013 2014 2015 2016E

TheimpactofBrexitwillbetheprincipalnear-termdragonEUeconomicgrowth.

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But the effects of the UK’s decision reach well beyond any immediateeconomic impact.Themoresevereand,apparently, increasing threat is thatothercountrieswillattempttosplinterawayfromtheEUinthewakeoftheUK’s vote. Demands to hold Brexit-style referenda are growing louder incountriessuchasFrance,theNetherlands,ItalyandSweden.

BeyondthepoliticsoftheEU,thereistheriskofatotalEUcollapsedrivenbythefailureofthesingle-currencyproject.Veryhighlevelsofgovernmentdebtin Greece and Italy and high unemployment in Spain could prompt anothereurozonecrisis.

To drive economic growth, European governments must address thestructural problems that make the region less competitive than the moredynamic economies of the US and China. Yet even if EU governments dealwith these problems successfully, they will be doing so amid existentialthreats to the EU. For now, at least, uncertainty appears to be the newnormal.

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalystFilippoBattainiResearchAssociateHONGKONG:10thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223002470LONDON:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017FBICGROUP.COM

europe consumer overview · 4deb july 11, 2016 orah weinswig, managingdirector, fung global retail...

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