Retail sentiment is gloomy, but what’s the reality?

The war in Ukraine has hit recovery in Europe’s retail markets just as they showed signs of picking up after the lifting of lockdown restrictions. But sentiment is gloomier than the actual situation, reports Olaf Janssen.

Consumer confidence is plummeting. In October of this year, the German Retail Federation’s consumer barometer fell for the third time in succession, reaching a new record low. The Covid-19 pandemic, Ukraine conflict, high inflation rates and rising energy costs are all having a negative impact on consumer spending.

This trend is reflected across Europe, as documented in the Global Retail Attractiveness Index, recently compiled by Union Investment and market research institute GfK. The GRAI measures the attractiveness of retail markets across a total of 20 countries in Europe, North America and the Asia-Pacific region. Compiled every six months, it is based on the latest data from GfK, the European Commission, the OECD, Trading Economics, Eurostat and national statistical offices.

In all 15 of the European countries surveyed, sentiment fell sharply in the third quarter of this year. The upswing in confidence seen in the second quarter of 2022 has vanished without trace. The associated indicator dropped by 40 points, reflecting high levels of uncertainty among consumers in light of the inflation forecasts for the current year and 2023.

‘Portugal was the only country in the EU-15 index to record growth in the third quarter, bucking the general trend by climbing five points.’

Olaf Janssen, Union Investment

However, sentiment is much gloomier than the actual situation. In large parts of Europe, labour markets remain intact and retail sales are stable. In the latest survey, a double-digit increase was recorded for the relevant GRAI indicators (plus 12 and plus 10 points) compared with the same quarter in the previous year.

Countries in Southern Europe relatively robust

Overall, the picture is mixed. In a tough trading environment, retail markets across Europe have been affected in varying degrees by the direct and indirect impacts of price increases that are being driven by shortages of raw materials and higher energy costs. Retail markets in Poland and in Southern European countries have proved to be relatively robust during the crisis, with Portugal even seeing positive growth.

However, the negative effects on consumer confidence and retail activity in other parts of Europe are clearly apparent in the Global Retail Attractiveness Index. In Germany, Austria, Finland and Sweden, the index fell by 15 points on average in the third quarter of 2022, compared with the same quarter of the previous year. The EU-15 index dropped seven points overall year-on-year, reaching its lowest level since the first quarter of 2021 at 106.4 points.

Portugal a bright spot

The Portuguese retail market is an outlier among the countries analysed. It was the only country in the EU-15 index to record growth in the third quarter, bucking the general trend by climbing five points. Portugal, Poland and France were the new top trio in the index at the end of the third quarter. Germany dropped out of the top group for the first time and now ranks in fifth place. Sweden remains the worst performer.

Despite these significant falls, the EU-15 index outperformed the indices in North America and Asia at the end of the third quarter. With slightly smaller losses than in Europe, the retail index in Asia-Pacific was once again below average.

The North America index declined the most, compared with Europe and Asia-Pacific. This reflects a marked fall in sentiment on both the business retail side and the consumer side. The drop in Asia-Pacific was mainly due to declining retail sales.

The biggest losses in the two non-European indices were recorded in Australia (minus 14 points) and Canada (minus 13 points) at the end of the third quarter.

Returns remain stable

Returns on retail properties in Europe have been relatively stable over the past 12 months despite weak sentiment and the recent significant increases in financing costs. Nevertheless, European retail rents are likely to come under pressure this year in the wake of high inflation rates and rising energy costs. Rents will continue to see adjustments next year as well, with slight rental growth then possible from 2024 onwards. 

Olaf Janssen is head of real estate research at Union Investment

For more information about Union Investment’s Global Retail Attractiveness Index Q3 2022 use the QR code here.