Consumption of durable goods in the euro area

Prepared by André Casalis and Georgi Krustev

1 Introduction

• [1] Second, expenditure on durables can help us better understand cross-country heterogeneity in terms of consumption and saving habits, as well as its drivers.
• Third, since purchases of durables can be financed using credit, the behaviour of durable goods provides important insights into the state of financing conditions in the economy.
• Expenditure on durable goods is a key component of consumption dynamics, despite accounting for a modest share in aggregate household spending.
• [2] Chart 1 Developments in private consumption in the euro area (annual percentage changes and contributions in real terms)
• First, a durable good provides utility over multiple periods and (like capital) is subject to depreciation.
• [4] Finally, changes in the stock of durables may be subject to adjustment costs.
• [5] Box1 provides further details on the statistical features of durable goods consumption data in the euro area.
• Semi-durable goods differ from durable goods in that their expected service life, although over one year, is often considerably shorter and their purchase price lower.
• Instead, the housing services consumed (and produced) by households living in dwellings owned by them (i.e.
• Consumer durable goods include furniture and household appliances (including kitchen equipment), personal transport equipment (i.e.
• Households expenditure on consumer durables accounts for about 9% of households final consumption (based on the domestic concept, see below) in the euro area.
• Chart A Euro area households final consumption by consumer goods and services and by groups of consumer durables, in 2018 (percentage of households final consumption; percentage of households final consumption of durable goods)
• While households total final consumption entering the expenditure side of GDP reflects the national concept (i.e.
• the expenditure of the residents of a country, whether domestically or abroad), the split of durable and non-durable consumption reflects the so-called domestic concept of households final consumption (i.e.
• all consumption expenditure in the domestic territory, irrespective of the residency of the consumer).
• Combining the two sources also enables the derivation of durable goods expenditure in deflated (volume) terms.
• Section 2 describes the characteristics and behaviour of durable goods consumption over the business cycle.
• Section 3 covers the relevance of financing conditions, including a specific focus on car purchases.
• Section 4 deals with long-run trends in relative prices and shares of durable goods in consumption.

2 Behaviour and characteristics of durable goods consumption

2.1 Cyclical behaviour of durables

• Expenditure on durables tends to be volatile and pro-cyclical, reflecting the specific characteristics of this type of good.
• The pro-cyclicality of expenditure on durable goods was particularly pronounced in Italy and Spain during the European sovereign debt crisis.
• [8] Moreover, the household sector in Germany was more resilient than in other large euro area countries.
• Table 1 shows the share of consumption and its components in terms of GDP, and the corresponding share of GDP variance explained.
• Total private consumption accounts for two-thirds of GDP in the United States and slightly more than one-half in the euro area.
• However, its overall contribution to the variance of GDP is typically smaller given the smooth behaviour of services, the largest component within non-durable consumption items.
• Table 1 Cyclical properties of consumption and its components (percentage shares and percentage of variance explained)

2.2 Turning point analysis

• Turning point analyses focus on identifying time periods in which an economy switches from one regime to another, for instance from a phase of expansion to a phase of contraction, and vice versa.
• In this section, results for the euro area are shown based on two different approaches for defining a recession.
• One approach is based on the official business cycle dating methodology used by the Euro Area Business Cycle Dating Committee of the Centre for Economic Policy Research (CEPR).
• Chart 3 Turning points for GDP expenditure components in the euro area (recessions shown in grey bars based on CEPR dating; turning points identified by the MBBQ algorithm)
• Aside from downturns coinciding with official recessions, turning points in durables have also occurred historically outside recessions but during periods typically characterised by economic weakness.
• One such occurrence, for instance, was in the early 2000s, when economic activity in the euro area experienced a significant loss of momentum.
• At the same time, it appears more consistent in signalling shifts between economic regimes than other consumption items such as services, which often do not exhibit turning points during official recessions.
• Chart 4 Turning points for GDP expenditure components in the United States (recessions shown in grey bars based on NBER dating; turning points identified by the MBBQ algorithm)

3 Durable consumption, credit and financing conditions

• Financing conditions are particularly relevant for the purchase of big-ticket items such as durables, which, because of their longer lifespan and higher unit value, are more often acquired with credit and are sometimes eligible for use as collateral to secure the underlying credit claim.
• [13] Box 2 provides further details on the use of credit for durable goods purchases in the euro area.
• Box 2The use of credit for durable goods purchases in the euro area Prepared by Matteo Falagiarda and Mika Tujula A large share of purchases of durable goods in the euro area is financed via credit.
• [14] This feature makes durable goods more exposed to credit conditions and monetary policy than non-durable goods.
• From a country perspective, a similar pattern can be observed in Germany and Spain, where the bulk of households durable goods purchases in the pre-crisis period was financed with credit.
• Movements in new business volumes in consumer credit have generally followed changes in consumption expenditure on durable goods very closely (see panel (b) in Chart A).
• The correlation between durable goods consumption and new business volumes in consumer credit from the first quarter of 2004 to the fourth quarter of 2019 is around 0.75.
• This strong link is also confirmed by the ECBs euro area bank lending survey, which suggests that spending on durable goods is an important contributor to the demand for consumer credit.
• This robust relationship is also driven by the fact that durable goods, particularly cars, may serve as collateral to back the corresponding credit claims.
• The improved macroeconomic environment considerably reduced borrowers credit risk, thereby allowing banks to ease their credit supply conditions.
• As a result, durables correlate closely with demand for consumer credit and can provide important insights into the state of financing conditions in the economy.
• Moreover, during the global financial crisis in 2008-09, the tightening of credit standards by banks restricted the availability of credit from the supply side and coincided with a significant contraction in durable goods purchases.
• Chart 5 Supply of and demand for consumer credit, and durable goods consumption in the euro area (left-hand scale: net percentages; right-hand scale: annual percentage changes)
• Divergent patterns in durable goods expenditure across different countries can therefore also reflect heterogeneity in financing conditions.
• Chart 6 displays durable goods consumption, expenditure on cars and consumer credit during two phases of the business cycle, for the euro area as a whole and across the four largest economies.
• By contrast, in the second period starting in 2013, as credit availability improved and the crisis-induced dispersion of financing conditions across euro area economies declined with the support of policy measures, both credit growth and durable goods expenditure including purchases of vehicles recovered, expanding at above-average rates in Italy and Spain.
• [17] Chart 6 Consumer credit, durable consumption and expenditure on cars (average annual percentage changes)
• In particular, car purchases stand out as a major item within durable goods consumption at around 40% of the euro area total that is strongly affected by financing conditions (see Chart 7).
• As a consequence, the pattern of car purchases mirrors aggregate financing conditions and the strength of the economic cycle.
• Chart 7 Consumption of durable goods in the euro area (annual percentage changes and contributions in real terms)
• Expenditure on cars can also be an idiosyncratic source of fluctuations in durable consumption.
• [19] The car-led recovery in durables during the recession proved to be short-lived, as the subsidies mostly brought forward future demand.
• In the course of the latest expansion, expenditure on cars has provided a major impetus to the sustained growth in durables amid supportive financing conditions and the easing of banks credit standards for consumer loans since 2014.
• During this period, favourable funding conditions are likely to have supported durable goods expenditure more effectively since durables tend to react more strongly to monetary shocks during expansions than during recessions, as consistently found in the literature.
• [20] Using micro data, Box 3 investigates the heterogeneity across households in car purchases and the use of car loans during the recovery.
• They make up about 40% of durable goods consumption at the aggregate level and account for much of its cyclical variation.
• The distribution of loans for car purchase can also provide useful information on macroeconomic and financial conditions.
• Chart A Households car purchases and loans funding car purchases in the euro area (percentages and thousands of 2017 EUR)
• Both the share of households who bought a car and the median value of the car increased for all income groups.
• Similar increases were recorded across other socio-demographic dimensions, such as age, education and employment status.
• The increases in car purchases were sizable throughout the income distribution, including the lower and middle segments.
• This may reflect the fact that durable goods, including cars, are particularly pro-cyclical.
• A durable good provides households with a stream of services throughout its lifetime.
• This increase in the median value of loans funding car purchases for lower income households may reflect their more optimistic expectations about the economy and less binding credit constraints.
• This fact suggests that a precautionary saving motive may have been an important factor dampening durable goods spending during the Great Recession.
• As with income risk, durable goods consumption is also influenced by how well households are insured against shocks in terms of net liquid assets.

4 Relative prices and relative consumption of durables

• Over the long run the relative price of durables exhibits a sustained downward trend.
• The relative price, as measured by the ratio between the consumption deflators of durables and non-durables (the latter including semi-durables and services), has declined by almost 40% in the euro area since 1999 (see Chart 8).
• The increase in the affordability of durables has benefited from globalisation trends and has been observed also in other advanced economies, such as the United States, the United Kingdom and Japan.
• Chart 8 Relative consumption and relative prices of durables in the euro area (index of relative prices and relative consumption in real and nominal terms, 1999 Q1 = 100)
• Box 4 The impact of durable goods prices on HICP inflation Prepared by Luigi Ferrara Durable goods prices have not provided support to euro area inflation developments over the past two decades.
• Their contribution to headline and underlying inflation has, on average, been zero (see Chart A).
• [25] Chart A Durable goods inflation, HICP inflation excluding energy and food and its components (annual percentage changes and percentage points, monthly data)
• Chart B decomposes developments in durable goods prices into six major items: cars, furniture, household appliances, computers, telephones and others.
• Prices for computers have declined, on average, by 10% and have not seen a positive annual rate of change since 1999.
• Accounting for more than half of the weight of durables, they shape the trend and volatility of the HICP durable goods aggregate.
• If computers and telephones were excluded from durable goods, the average durable goods inflation rate over the past two decades would have been slightly positive.
• Chart B Major durable goods items: average inflation rate and standard deviation 1999-2020 (average annual percentage changes and percentage points)
• For instance, the high degree of technological progress since the late 1990s is likely to have been particularly prevalent for computers.
• Similar adjustments for quality improvements, although not to the same extent, are also applied to car prices.
• [27] This factor has contributed to the relatively muted average inflation rate of durable goods over the past two decades.
• Over time, the decline in relative prices has coincided with a rise in real durable consumption relative to other items.
• As evident in Chart 8, favourable price developments have contributed to an increase in the share of durables in total consumption in real terms, despite a modest decline in the corresponding nominal share.
• At business cycle frequency, however, relative durable consumption can respond to country-specific economic conditions, being affected by pent-up demand and catch-up effects.
• Chart9 Dynamics in relative consumption, relative prices and real disposable income (average annual growth rates as percentages)

5 A structural decomposition of consumption taking into account durable goods-specific shocks

• In the empirical literature few studies distinguish durables consumption from non-durables consumption and explore how they are interconnected, especially for the euro area.
• The empirical analysis is based on a vector autoregressive (VAR) model featuring durable goods, where the structural shocks are identified based on theory.
• [31] The model uses five variables, volumes and prices of durable and non-durable consumption and the nominal interest rate on consumer credit.
• The methodology allows consumption to be decomposed into contributions from structural shocks.
• Chart 10 presents a historical decomposition of overall consumption and of durable goods consumption growth in the euro area.
• Chart 10 Model-based historical decomposition of private consumption in the euro area (percentage point contributions from structural factors to the average annual growth rate of private consumption excluding trend, as percentages)
• In particular, durable goods-specific supply shocks have continued to provide positive, albeit modest, support to consumption throughout the last years of the sample ending in 2019.
• Aggregate macroeconomic shocks contribute strongly in driving durable consumption and the broader economy.
• As expected, durable goods-specific shocks play a larger role in driving durables expenditure (see panel (b) of Chart 10) than overall consumption (see panel (a) of Chart 10).
• At the same time, aggregate shocks such as shocks to aggregate demand, aggregate supply and monetary conditions matter at least as much for durables as sector-specific shocks.

6 Conclusions