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Consumer trends, spending intentions and coping mechanisms in response to rising prices.

If there is one thing we have learned over the past few years, it is that consumer behaviour is constantly changing, both in Cyprus and globally. Although the ongoing pandemic drove consumer behaviour throughout 2020 and 2021, it is having less of an impact in 2022 and much less of a foreseen impact in 2023.

Most importantly, consumer behaviour has been heavily impacted throughout 2022 by inflation, environmental concerns, and an impending recession. Because of the lack of stability in the global geopolitical environment, there has been a significant shakeup in the global energy supply chain, putting inflationary pressure on other goods and services because energy and, consequently, production costs are significantly higher.

In an effort to identify and assess how these factors have affected consumer behaviour in European countries until the end of 2022, various aspects and facts are briefly analysed below.

Consumer confidence

Unprecedented levels of uncertainty have resulted in consumer confidence drop, particularly by the end of 2022. This was caused by the worsening of households’ finances, as a result of inflation, since the cost of living went significantly up and purchasing power decreased.

Consumer confidence in the levels of disposable income remained low, along with the levels of debt. With high inflation rates, many consumers are using their savings or going into debt to fund their spending and maintain their standard of living. This resulted in a decrease in their savings compared to 2021 and an increase in buying products or services on credit.

While the measures announced had a significant impact on the European financial markets, they are likely to have also resulted in the further deterioration of consumer confidence, given the unexpected rise in mortgage rates.

Consumer spending

During 2022, consumers turned to recessionary behaviours. More specifically, they have been reducing their overall expenditure by cutting spending in both day-to-day and non-essential categories. With spending on essential goods and services, such as energy and food, taking a bigger share of their finances, the share of discretionary expenditures is falling. As a result, the costs of socializing, such as going out and eating out, have decreased. Consumers are deliberately reducing their spending related to leisure activities in an attempt to control their already tight budget.

Moreover, consumers are not only cutting down on larger expenses, but they are also trading down by buying cheaper brands, including supermarkets' own labels, or buying more promotional goods while taking advantage of sales and discounts. However, consumers are not cutting back as much on beauty and personal care goods and services.

Additionally, consumers are reducing home energy consumption, terminating subscriptions, and postponing major purchases, while opting for the second-hand market—either through reselling or buying—buying on credit, and switching to cheaper brands and discount stores to cope with the unprecedently rising prices.

Impact of consumer behaviour in various sectors

With regards to the retail sector, sales have also fallen during 2022 compared to the year before because of the decrease in demand and soaring inflation. As a result of the price surge in the majority of categories, consumers were left with no choice but to cut back on how much and what they purchased.

Therefore, a more competitive promotional climate is likely as discretionary spending continues to weaken. Clothing and gifting—once reigning categories when it comes to spending—are expected to be the most affected. This could make it harder for companies to pass on price increases without risking sales.

On top of that, consumers are also postponing major purchases, such as buying a new car or rescheduling large home improvements. These results point to further construction in home-related sectors such as the DIY and furniture categories. However, because of the increase in energy costs, many consumers are looking into more energy-efficient solutions, which has led to a growth in electrical equipment spending.

As already mentioned above, food sales volumes were down in 2022. While this was caused, in part, because people have been eating less at home since offices and restaurants reopened after the suspension of the measures imposed by governments due to the pandemic, it also highlights the impact of rising food prices on the cost of living. Also, consumers continued to switch brands to ease pressure on their households’ budgets by opting for discount stores when it came to shopping.

According to research, consumer spending is expected to shrink across all consumer product categories and affect consumer-facing businesses, with retailers being particularly exposed. A fall in both essential and discretionary categories is predicted for 2023. With consumers increasingly switching products and stores but also trading down to save, premium category sales are likely to decline in the coming months.

Given the uncertain economic prospects, including the acceleration in the cost of borrowing and a predicted weakening in the housing market, a further deterioration of consumer confidence is being foreseen. Businesses will be gearing up for an increasingly price-sensitive consumer and should expect more demand contraction into 2023. Businesses will also have a renewed focus on cost reduction. As a result, the sector could see an increase in the number of divestitures and a pause on some major capital projects.

The global economic and political turmoil of the past few years has adversely affected consumer behaviour, which is expected to be further impacted by the continuing increase in interest rates in an attempt to fight inflation. All these developments will have a major impact on various elements of the global and local economies and need to be carefully considered by governments in an effort to detect them and act against their unfavourable effects to eventually overcome this crisis.

The article is based on Deloitte's Consumer Tracker report - Q3 2022

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