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The COVID-19 pandemic has triggered Europe's biggest economic contraction onÌýrecord. One reason why the output loss has been so severe is that householdÌýconsumption, which represents 54% of GDP and is usually quite stable across theÌýbusiness cycle, has suffered an exceptionally deep decline as a result of widespreadÌýmobility restrictions. In this report, we gather the insights of ÃÛ¶¹ÊÓƵ economists, strategistsÌýand sector analysts (covering General Retail, Food & HPC, Beverages, Luxury Goods,ÌýLeisure, Airlines, Autos and Banks) to gauge the outlook for household consumption.ÌýWe focus not just on the cyclical outlook, but also on structural changes post pandemic.

Our analysis points to an uneven recovery across Europe and crucial shifts inÌýconsumption patterns triggered by a greater focus on e-commerce and onlineÌýshopping, health and ESG, as working from home and reduced business travel andÌýcommuting are likely to remain permanent features of the post-pandemic world. WeÌýattempt to identify the extent to which the developments we expect are priced in, andÌýshow how all these factors inform our preferred stock selections.

From a macro perspective, we are reasonably constructive on the outlook for householdÌýconsumption. Specifically, we think that, after contracting by 7.9% in 2020, EurozoneÌýreal household consumption will grow 4.7% in 2021 and 4.8% in 2022 – moderatelyÌýabove consensus for 2021 (4.4%) and more significantly above consensus for 2022 (3.8%). As a result, (real) consumption would return to pre-crisis levels by Q2 2022; inÌýnominal terms, this should happen by end-2021.

Despite a weak start to 2021, we expect a substantial relaxation of mobility restrictions as of Q2, along with progress on vaccinations, such that economic activity should face far fewer obstacles in Q3 and Q4 2021. This should facilitate a meaningful recovery in consumption, including from pent-up demand, despite lingering headwinds from higher unemployment and slowing wage growth. However, we expect clear differences across countries, with the recovery fastest in Germany, France and Switzerland, but slower in Italy, Spain and the UK.

The above notwithstanding, a host of other factors are also at play, both from a microÌýperspective and a longer-term structural perspective. The COVID crisis has triggered far reaching changes to the global economy, sometimes accelerating forces that wereÌýalready underway before the crisis, sometimes unleashing new ones. ÃÛ¶¹ÊÓƵ Research hasÌýcovered these tectonic shifts to the global economy in a landmark Q-Series: FutureÌýReimagined: Propelled to the Thinking Economy, identifying seven Megatrends, manyÌýof which affect consumer sectors: what we consume, how we consume, where weÌýconsume. We summarize how to identify businesses – across multiple industries – thatÌýwill likely be most/least favoured by these Megatrends.