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Wednesday, February 7, 2018

EU Economy - Growth in the consumption of durable goods has been very strong in recent years ..- Report ECB

Publication 06/ 02/2018 - Consumption of durable goods in the ongoing economic expansion -  By Maarten Dossche and Lorena Saiz 

Household spending on durable goods is the part of private consumption that is most sensitive to the business cycle. Private consumption encompasses services, non-durable goods, semi-durable goods and durable goods. Durable goods typically have an expected lifetime of more than three years, whereas semi-durables and non-durables have a shorter lifetime.1 Households do not derive utility directly from spending on durable goods in the current period, but rather from the flow of services they provide over their lifetime.

 As a result, the consumption of durable goods is more sensitive to the business cycle. Households may temporarily reduce these purchases when their income falls, without any great reduction in utility in the short term. When their income recovers, they can then resume their purchases again in order to offset earlier losses in their stock of durables. 2 In addition, durable goods also have a greater tendency to be financed using credit, owing to their high unit value and their longer lifetime. 

The high unit value of durable goods means that current income may not be sufficient, so households may need credit to finance them. Moreover, owing to their longer lifetime, some durable goods can be used as collateral, which makes them easier to finance using credit. However, as credit standards are usually tighter during economic downturns and looser during expansions, this also makes them more sensitive to the business cycle.3 As a result, even though durable goods only account for around 10% of total consumption, they explain up to 20% of total variation in consumption growth owing to their greater variability. 

Growth in the consumption of durable goods has been very strong in recent years. During the financial crisis, durable goods consumption contracted sharply (see Chart A), although the car scrappage schemes in several euro area countries provided some relief by encouraging purchases of new cars (e.g. in 2009). Since 2013, durable goods consumption has again grown vigorously, pushing up growth in overall consumption. The recovery observed in real disposable incomes and the easing of financing conditions have both boosted households’ appetite for durable goods, particularly in those euro area countries that were more affected by the financial crisis.

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