Concerns about rising military and diplomatic tensions across the globe are often mentioned as a possible factor weighing on economic growth and recovery in the euro area. Indicators of these risks, such as those developed by Caldara and Iacoviello (2022), show evidence that geopolitical tensions have become more elevated in recent years.
Such geopolitical risks are typically associated with lowered business sentiment, which can constrain firm investment and international trade.
However, we know far less about how geopolitical risks may be transmitted to the household sector, influencing consumer sentiment and potentially affecting spending behaviour. As inflation has come down, the euro area has seen a significant rise in measures of consumer confidence. More recently, this rebound may have started to level out and the overall level of confidence remains noticeably below its long-term average, which could reflect rising geopolitical risks. This pattern may in turn partly explain the relatively muted growth in private consumption in many euro area economies, particularly compared with the US.
In this column, we draw on new data collected using the ECB’s Consumer Expectations Survey (CES; see ECB 2021, Georgarakos and Kenny 2022) to assess the role of geopolitical risks in shaping consumer sentiment and spending behaviour.
The most recent CES data show signs of deterioration in consumer sentiment, with both the share of consumers who expect a recession and those who expect a worsening of their own financial situation starting to rise after August 2024 (Figure 1). The rise in consumers’ concerns about a worsening of their own financial situation is particularly surprising given the growth observed in actual real incomes, reflecting both higher wage growth and declining inflation (Bobasu et al. 2024). The CES data also suggest that weaker sentiment may translate into weaker spending. For example, Figure 1 depicts the annual change in the share of consumers who plan to make large durable good purchases (cars, televisions, etc.). This indicator has been trending downwards since early 2024. The most recent observations are now close to zero, implying that the strengthening dynamics of durable goods purchases may have reached a plateau toward the end of 2024.
Figure 1 Euro area consumer sentiment, recession expectations, and durable consumption plans
Notes: Population weighted data. Each month, consumers are asked in the CES about purchasing plans for durable goods. In blue, we show the year-on-year change in the percentage of consumers who plan to purchase cars or home appliances over the next 12 months. Year-on-year changes are calculated to account for seasonal effects. The percentage of consumers who expect their financial situation to be ‘somewhat’ or ‘much’ worse-off 12 months from now compared to today are depicted in red. The CES also collects monthly expectations about economic growth – the yellow line shows the percentage share of consumers who expect the economy to shrink over the next 12 months.
Source: ECB Consumer Expectations Survey (CES), latest data February 2025.
Is there a link between low consumer sentiment and geopolitical risks?
One way to examine the link between consumer sentiment and geopolitical risks is to ask consumers directly. In the December 2024 round of the CES, we asked consumers the following question: ‘How concerned are you about the impact of the current geopolitical events on the financial situation of your household, over the next twelve months?’. In replying, respondents were asked to rate their concerns from zero (“not concerned at all”) to ten (indicating that they were “extremely concerned”).
The survey replies demonstrate considerable dispersion across the population in the level of concern about geopolitical risks. The distribution of concerns is skewed toward higher levels of concern with a peak share of 17.1% of consumers indicating a score of seven, and 7.5% of consumers selecting the highest ‘extremely concerned’ option. Across demographic groups, it is the relatively lower-income CES respondents who indicate the highest level of concerns about geopolitical risks, while high-income consumers are less likely to indicate concerns about geopolitical risks. We are also able to examine the possible connection between levels of concern about geopolitical risks with consumers’ expectations about their own financial situation over the next 12 months. The evidence points to a significant positive association (Figure 2 – blue line), in the sense that those who express the highest level of concern about geopolitical risks are much more likely to expect a worse overall financial situation for their own household than those who indicate lower levels of concern.
Figure 2 Consumer sentiment and geopolitical concerns
Notes: Population weighted data. Binscatter plot shows the association between financial sentiment, crisis beliefs, and perceived job-loss probabilities on the y-axis, and geopolitical concerns on the x-axis (see Chart 2). Consumers are asked ‘looking ahead, do you think your household will be financially better off or worse off in 12 months from now than it is today?’ (financial sentiment); ‘What is the probability that there will be a financial crisis affecting the financial system and the economy in your country in the next 12 months?’ (crisis beliefs); and, each quarter, ‘What do you think is the percentage chance that you will lose your current job during the next three months?’. Respondents’ job loss expectations were collected in October 2024 for employed consumers. The linear fit accounts for country fixed effects.
Source: ECB Consumer Expectations Survey (CES), October and December 2024.
Figure 3 Income uncertainty and geopolitical concerns
Notes: Population weighted data. Consumers in the CES are asked each month how they expect their net household income will develop over the next 12 months. Based on the subjective distribution on ten pre-specified bins, we derive the interquartile range as a measure of their uncertainty. We winsorised the measure of income uncertainty at the two most extreme percentiles to account for outliers. The linear fit accounts for country fixed effects and individual-level socio-demographic heterogeneity (e.g. age, gender, household size, income quartiles, and education).
Source: ECB Consumer Expectations Survey (CES), December 2024.
Geopolitical concerns and uncertainty about household income
Beyond the possible negative response of consumers’ expected financial situation to more elevated geopolitical risks, an additional and complementary channel may arise as households become more uncertain about their future income prospects. Indeed, the CES data points to a positive association between consumers’ concerns about geopolitical risks and their uncertainty about the evolution of their own income over the next 12 months (see Figure 3). Such an uncertainty channel is often seen as encouraging precautionary behaviour, such as augmented savings and a lower propensity to spend, particularly on durables.
Figure 2 demonstrates a noticeable positive association between geopolitical concerns and consumers’ perceived risk of losing their own jobs, as well as with their subjective perceptions about the risk of a financial crisis over the next 12 months.
Although this descriptive evidence does not necessarily capture a causal effect, the CES data are consistent with the idea that elevated concerns about geopolitical risks may weigh negatively on consumer sentiment and the purchase of durable goods, consistent with the recent developments described in Figure 1.
How can the duration of geopolitical conflict weigh on consumer expectations?
The preceding analysis is suggestive of a close link between consumers’ concerns about geopolitical risks and their broader economic sentiment. To provide more definitive evidence on these linkages, in the September and December 2024 waves of the CES we presented consumers with different geopolitical scenarios that varied in their duration in order to test more formally how consumers’ expectations may adjust to changes in the geopolitical environment.
Figure 4 Consumers’ 1-year-ahead expectations under different duration scenarios of geopolitical conflicts
Notes: Population weighted data – figure shows the percentage of consumers. In September, respondents were presented with one of three scenarios: ‘Suppose that the war in Ukraine and conflict in the Middle East end by December 2024 / continue in the course of next year and end by December 2025 / continue for the next three years (and possibly beyond)’. They were then asked: ‘How do you think this will affect (if at all) each of the following in the country you currently live in, over the next 12 months’, on a five-point scale from ‘decrease a lot’ to ‘increase a lot’. For analysis, responses indicating ‘decrease a little’ and ‘decrease a lot’ were combined, as were those indicating ‘increase a little’ and ‘increase a lot’.
Source: ECB Consumer Expectations Survey (CES), September 2024.
To this end, we focused on examining how a prolongation of two current major military conflicts in Ukraine and in the Middle East would affect consumer perceptions and expectations. Respondents to the CES were randomly assigned into three groups. Each group was asked to consider one of three scenarios related to the duration of these conflicts: 1) an immediate or relatively swift cessation of the conflicts (over the next three months); 2) a further prolongation by one year; and 3) an extension of both conflicts for a period of three years or longer. Subsequently, respondents were asked, on a five-point scale from increase (a lot) to decrease (a lot), to assess the effects of their scenario on wider conflicts across countries and on an array of macroeconomic and microeconomic expectations over the next 12 months. The random assignment of scenarios across respondents ensures that the main underlying factor driving the average difference in responses by group reflects the varying duration of the conflict and not differences in respondents’ characteristics, which net out on average.
Figure 4 shows consumers’ expectations under the three different scenarios.
The results demonstrate a strong monotonic response of household expectations to a prolongation of these geopolitical conflicts. Under the extended conflict scenario, there is a sharp increase in perceptions that the current conflicts could spill over and widen to include other countries. In addition, prolonged conflict raises expectations for inflation and diminishes expectations for economic growth. These findings suggest that a prolongation of geopolitical conflict is perceived by consumers as a supply-side shock, consistent with the supply shock nature of military conflict discussed in Federle et al. (2024) and survey evidence on the importance of supply-side narratives for consumer expectations.
Regarding the impact on expectations for households’ own financial wellbeing, the effects of a prolongation by three years or longer are also negative, though the impact appears more muted compared with the effects on economic growth expectations. One possible explanation for this is that households may initially underestimate their own exposure to geopolitical events, seeing themselves as relatively insulated from the more macroeconomic deterioration (e.g., because of government support or social security provisions), at least over the next 12 months.
Finally, the analysis highlights a clear distinction showing how a prolongation of current conflicts would transmit to asset prices. On the one hand, a conflict lasting three years and beyond is associated with a very dramatic expected decrease in stock prices and the price of other financial assets. This result aligns with the positive association between geopolitical concerns and the risk of financial crises depicted in Figure 2. However, house price expectations are relatively insensitive to the prolongation of the conflicts. This latter finding may reflect the relative resilience of many euro area housing markets and strong growth in house prices over recent years, as well as broader consumer perceptions that housing offers a hedge in periods of economic turbulence.
Geopolitical risks, consumer sentiment, and the marginal propensity to consume
We also aim to gain a better understanding of how the detrimental effects of geopolitical risks on consumer sentiment could ultimately affect households’ spending behaviour. To this end, we asked consumers how much they would consume of a one-time bonus of €3,000 that they unexpectedly received from the government. Such hypothetical questions are often fielded in household surveys to elicit the respondents’ marginal propensity to consume (MPC) out of different possible shock scenarios (here we assume an unexpected, transitory, and positive income shock) (Christelis et al. 2019). For the purposes of our analysis, we examine how such MPCs vary between households that report a worse financial situation compared to those reporting the same or improved sentiment in each of the three geopolitical scenarios. The results, shown in Figure 5, suggest a wedge in MPCs between consumers with a worse or an improved financial sentiment due to the prolongation of geopolitical conflicts. For example, if the war lasts for one more year, the MPC out of a positive shock for consumers who expect an improvement in their financial situation is 51.8% – 7.3 percentage points higher than the MPC of their pessimistic counterparts. This wedge becomes even starker under the most prolonged war scenario. Taken together, these results suggest that a deterioration in consumer sentiment due to prolonged geopolitical conflict could be a factor that inhibits spending even as real incomes rise.
Figure 5 Marginal propensity to consume under different duration scenarios of geopolitical conflicts
Notes: Population weighted data. Chart displays the average marginal propensity to consume (MPC) across consumers, categorised by their expected financial situation subject to different scenarios regarding the resolution of geopolitical conflicts. In September, consumers were asked how they would use an unexpected net payment of €3,000 from the government: ‘How would you use this unexpected extra income transfer over the next 12 months?’ from the following categories (1) buy goods and services that don’t last for a long time, (2) buy long-lasting goods and services, (3) save, and (4) repay personal debt. We compute the MPC as the share of €3,000 reported under (1) and (2) and calculate the average MPCs by their expected financial situation subject to different duration scenarios of geopolitical conflicts.
Source: ECB Consumer Expectations Survey (CES), September 2024.
Cross-country differences in the spillovers from geopolitical tensions
In terms of their direction, the above effects of prolonged geopolitical tensions at the euro area level represent a consistent pattern across the 11 euro area countries included in the CES. Further detailed examination of our experimental results shows that the expected rise in the prices of goods and services associated with a three year or longer prolongation of military conflicts is largely homogenous across all 11 euro area countries, with the largest effect in Greece and the smallest (but still substantial) net increase in France. France is also the country where respondents perceive the weakest (though still negative) impact on their own financial well-being. Amongst the other euro area countries, our results show the strongest negative effect on financial well-being in Portugal, Finland, Greece, and Germany.
Conclusions
In this column, we examine the potential for consumers’ concerns about geopolitical risks to spill over into their wider economic sentiment, various expectations, and spending. Our analysis clearly supports a role for such factors in weighing negatively on sentiment and leading to more pessimistic economic expectations, more elevated income uncertainty, and a lower propensity to consume. Consumers also perceive that geopolitical tensions can be transmitted via stock prices and other financial assets. However, they expect house prices to be relatively immune, even when there is a significant deterioration in the geopolitical landscape and a prolongation of geopolitical tensions.
Authors’ note: The views expressed here are those of the author and do not necessarily represent the views of the European Central Bank or the Eurosystem.
References
Bloom, N, D Fuceri and H Ahir (2022), “Tracking uncertainty in a rapidly changing global economic outlook”, VoxEU.org, 17 December.
Bobasu, A, J Gareis and G Stoevsky (2025), “What explains the high household saving rate in the euro area?”, Economic Bulletin Boxes, 8.
Caldara, D and M Iacoviello (2022), “Measuring Geopolitical Risks”, American Economic Review 112(4): 1194–225.
Candia, B, O Coibion and Y Gorodnichenko (2020), “Communication and the Beliefs of Economic Agents”, NBER Working Paper No. w27800.
Christelis, D, D Georgarakos, T Jappelli, L Pistaferri and M Van Rooij (2019), “Asymmetric Consumption Effects of Transitory Income Shocks”, Economic Journal 129(622): 2322–41.
Coibion, O, D Georgarakos, Y Gorodnichenko and G Kenny (2025), “Geopolitical risks and their effects on consumer expectations and behaviour”, mimeo.
Coibion, O, D Georgarakos, Y Gorodnichenko, G Kenny and M Weber (2024), “The Effect of Macroeconomic Uncertainty on Household Spending”, American Economic Review 114(3); 645–77.
ECB (2021), ECB Consumer Expectations Survey: An Overview and First Evaluation, ECB Occasional Paper No. 287, by K Bańkowska, A M Borlescu, E Charalambakis, A Dias Da Silva, D Di Laurea, M Dossche, D Georgarakos, J Honkkila, N Kennedy, G Kenny, A Kolndrekaj, J Meyer, D Rusinova, F Teppa and V Törmälehto.
Federle, J, A Meier, G Müller, W Mutschler and M Schularick (2024), “Mapping the economic costs of war”, VoxEU.org, 26 March.
Georgarakos, D and G Kenny (2022), “Household spending and fiscal support during the COVID-19 pandemic: Insights from a new consumer survey”, Journal of Monetary Economics 129: S1–S14.
