European Central Bank blog analysis finds longer expected Ukraine and Middle East conflicts worsen euro area consumer sentiment and spending plans

The European Central Bank published an ECB Blog analysis using its Consumer Expectations Survey (CES) showing that geopolitical conflict expectations are closely linked to weaker euro area consumer sentiment, and that the expected duration of wars materially shapes households’ inflation and growth outlook. CES indicators point to deteriorating sentiment in the second half of 2024, with the share of consumers expecting a recession and anticipating a worsening of their own financial situation rising after summer 2024 and remaining elevated even as real incomes recovered. In a September 2024 CES module, respondents were randomly presented with scenarios in which the war in Ukraine and the conflict in the Middle East ended within three months, lasted an additional year, or continued for three years or more. Longer expected conflict durations were associated with expectations of higher inflation and significantly lower economic growth, while the perceived effect on households’ own finances was smaller than for the economy as a whole; house price expectations appeared relatively insensitive to conflict duration. A December 2024 CES question on concern about the impact of geopolitical events found heightened concern, particularly among lower-income households and those with less money at hand. Consumers most worried about geopolitical risks were more likely to expect a deterioration in their household financial situation, assign higher job-loss probabilities and perceive a higher risk of a financial crisis, consistent with a channel through which prolonged conflict can restrain spending and weigh on growth.