Nomura Securities recently released a research report suggesting that a consumer-led recovery in Europe is becoming increasingly unlikely, and the European Central Bank (ECB) is expected to accelerate interest rate cuts in the future.

The report indicated that previously, official institutions such as the ECB and the International Monetary Fund (IMF) had forecasted that, based on strong real wage growth, households tapping into excess savings, eventual easing of financial conditions, tight labor markets, and a general improvement in consumer confidence, the European economy could experience a consumer-led recovery this year and next, with Eurozone GDP growth expected to accelerate to a quarterly increase of 0.4-0.5%.

However, Nomura Securities believes that a consumer-led European economic recovery is becoming less and less likely, predicting that household consumption growth in Europe will be 0.5% in 2024 and 0.3% in 2025, respectively 60 basis points and 120 basis points lower than other forecasts.

The report states that the main basis for a consumer-led recovery is the belief that consumers have excess savings post-pandemic, which they can use to support medium-term consumption.

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The savings rate in the Eurozone is slightly higher than pre-pandemic levels, but household financial statement data shows that despite an increase in the savings rate since the pandemic, available cash has not increased.

Instead, consumers have increased their holdings of assets (fixed deposits, stocks, bonds), and pension valuations have also risen.

Households would need to sell assets to release cash to increase consumption, but Nomura Securities believes this is unlikely to happen.

The report says that strong nominal wage growth and slowing inflation would lead to stronger real wage growth, which is another reason many people expect a consumer-led recovery.

However, wage growth in the Eurozone has already slowed significantly, with negotiated wage growth in the Eurozone slowing to 3.6% year-over-year in the second quarter of 2024, compared to 4.7% in the first quarter.

Additionally, total compensation per employee has slowed by a larger margin of 80 basis points than the ECB's expectations.

Other forward-looking indicators, such as the Indeed wage tracker tool, suggest that wage growth may slow further in the second half of 2024.

Therefore, the slowdown in nominal wage growth is faster than expected.

At the same time, the Eurozone's Harmonized Index of Consumer Prices (HICP) inflation rate has also declined, standing at 2.2% in August.

However, the ECB and consensus expect inflation to gradually slow down until the end of 2025.

As a result, the slowdown in real wage growth is more significant than expected, indicating that consumers may not be able to make up for the loss of real income, and real wage growth will not support a consumer-led recovery.

The report indicates that the COVID-19 pandemic and the European natural gas crisis have dealt a significant blow to consumer confidence.

Although confidence has improved, it remains significantly below pre-pandemic levels.

The confidence index can be broken down into different elements, such as views on the overall economy, personal finances, job security, and the "Major Purchases Balance" index.

The report states that historically, the "Major Purchases Balance" index has been very closely related to overall consumer confidence, but a significant gap has emerged between the two since the beginning of 2023, and this gap still exists today.

Major consumer data remains sluggish, far below the overall consumer confidence level, indicating that a consumer-led recovery is unlikely.

In addition, Nomura believes that there may be a phenomenon of "labor hoarding" in the Eurozone, which increases the risk of a sharp rise in unemployment rates when companies lay off workers, thereby hitting consumer confidence and the willingness to make major purchases.

Therefore, Nomura believes that the lack of a consumer-led recovery will increase the risk of Eurozone economic growth falling short of expectations, which will only exacerbate concerns about the weak outlook for Eurozone economic growth, especially in the context of Germany's economy confirming a recession and France's GDP growth contracting in the fourth quarter of 2024.

The Bundesbank's monthly report released on Thursday has intensified the risk of recession, with the report expecting the German economy to continue to stagnate in the third quarter, or even contract slightly again after the second quarter.

The Bundesbank stated that increased economic policy uncertainty is putting pressure on investment activity, and rising financing costs are still affecting businesses.

The report said: "Despite favorable conditions—negotiated wages are rising significantly, and the labor market outlook remains relatively stable—private consumption has not gained momentum."

At the same time, the report indicates that inflation is becoming less of a concern in the Eurozone, and concerns about recession are expected to become more prominent in the ECB's stance.

As a result, the market should start to increase expectations for consecutive interest rate cuts by the ECB and anticipate more cuts than currently priced in by the market.

Nomura states that the ECB may gradually lower interest rates, reducing the deposit rate to 2.50% by September 2025, but the pace of rate cuts could be faster, and the terminal rate could also be lower than the institution's forecast; after all, central banks typically lower interest rates to an accommodative level, not a neutral level, when dealing with recessions.

Meanwhile, the stance of ECB Governing Council member Panetta also echoes Nomura's forecast, stating that the ECB may accelerate interest rate cuts in the coming months.