Household spending across the euro zone suffered a pronounced decline in the immediate aftermath of the Iran war, according to an analysis published in the European Central Bank's Economic Bulletin on Monday. The ECB attributes the weakening to a sharp fall in consumer confidence that followed the outbreak of the conflict.
Consumer sentiment fell steeply after the war began and, while it has edged up since then, it remains materially below levels seen prior to the conflict. The ECB said this deterioration in confidence has weighed on economic activity, adding to a period of modest growth across the currency union.
In April, the drop in household consumption was about twice as large as historical patterns would have predicted, the ECB noted. The magnitude of the reaction was similar to the response households displayed at the start of Russia's war in Ukraine in early 2022. "This suggests that the confidence channel is particularly strong in the case of large shocks that are widely perceived as such by consumers," the ECB argued.
Measured in nominal terms, consumption growth had averaged around 3% to 4% from mid-2024 but fell to roughly 2.5% year on year in April. The bank identified higher-income households as the principal drivers of the decline, with those households reducing discretionary spending.
The ECB interprets this pattern as evidence that the slowdown reflects changes in the timing of expenditures rather than binding income constraints. "This reinforces the view that the slowdown is not the result of binding income constraints but rather of households postponing purchases when they have the scope to adjust the timing of their spending," the report said.
Survey responses also show that households worried rapid inflation sparked by the conflict could erode their real incomes. Around 40% of those surveyed indicated they did not expect any lost income from such effects to be recovered, underscoring concern about the persistence of inflationary pressures and the potential hit to purchasing power.
The ECB's analysis highlights how geopolitically driven shocks can transmit to consumption through confidence channels and alter spending patterns, with implications for short-term demand dynamics across consumer-facing sectors.