Key facts
- Euro zone household consumption fell sharply in the early weeks of the Iran war.
- Consumer confidence tumbled significantly following the conflict's outbreak.
- The drop in consumption was twice as large as historical trends would suggest.
- The magnitude of the decline was comparable to households' response to Russia's war in Ukraine.
- Higher-income households were primarily responsible for cutting discretionary spending.
- Households feared that rapid inflation caused by the conflict could erode real incomes.
Euro zone household consumption experienced a sharp decline in the initial weeks of the Iran war, driven by a significant drop in consumer confidence, according to a European Central Bank Economic Bulletin article. The fall in consumption was twice as large as historical trends would suggest and was comparable in magnitude to the impact observed during the early stages of Russia's war in Ukraine in 2022.
The ECB noted that this suggests the confidence channel is particularly potent for large shocks perceived as such by consumers. Nominal consumption growth decreased to approximately 2.5% year-on-year in April, after hovering around 3%-4% on average from mid-2024. This slowdown was attributed to higher-income households reducing discretionary spending, indicating that the issue was not solely due to binding income constraints but also households postponing purchases when possible.