Economic apprehension is mounting among consumers in the euro area, intensifying due to geopolitical tensions linked to military conflicts, particularly the war in Ukraine and ongoing instability in the Middle East.

Recent findings from the European Central Bank (ECB) Consumer Expectations Survey (CES) indicate that consumer sentiment has notably declined in the latter half of 2024, with an increasing proportion of individuals anticipating a recession and a deterioration of their personal financial situations.

Data collected in February 2025 suggests a significant number of consumers expect adverse economic conditions, despite a statistical recovery in real incomes attributable to higher wage growth and decreasing inflation rates.

This contradiction reveals a complex perception among consumers regarding their financial outlooks amidst broader climatic concerns.

To assess the impact of varying expectations regarding the duration of geopolitical conflicts, the September 2024 CES presented participants with three potential scenarios: a swift conclusion of the conflicts within three months, a one-year prolongation, and a duration extending beyond three years.

The survey gauged participants' perceptions on how these scenarios would influence their economic expectations over the subsequent year.

Findings indicate a strong correlation between longer conflict durations and unfavorable economic outlooks among consumers.

Extended conflicts were associated with anticipations of heightened inflation and reduced economic growth, likely stemming from experiences related to earlier supply-side shocks, particularly concerning energy prices following the onset of the Russian invasion of Ukraine.

Furthermore, households expressed concerns over their financial futures directly linked to the anticipated longevity of these military conflicts, although the perceived impact on their personal finances was less acute compared to the overall economy.

This could suggest a belief that government interventions would offer some buffers against economic downturns.

Consumer expectations regarding housing prices exhibited relative insensitivity to the duration of geopolitical conflicts.

This phenomenon may reflect the resilience observed in many euro area housing markets, along with a perception of homeownership as a stable investment during periods of economic uncertainty.

The CES data from December 2024 further highlighted the negative correlation between consumer sentiment and geopolitical tensions.

Concern levels among individuals with lower incomes appeared significantly higher compared to wealthier households, indicating that economic anxieties related to geopolitical risks disproportionately affect less affluent consumers.

In analyzing the broader implications of these concerns, the survey reveals that consumers who remain preoccupied with geopolitical instability are more likely to project a pessimistic view of their personal finances.

They also exhibit elevated fears of job loss and the potential for a financial crisis in the coming year, which contributes to a more cautious approach towards spending.

These behavioral insights imply that ongoing military conflicts could restrain consumer expenditure and subsequently stunt economic growth in the euro area, even in the context of rising real incomes.

Overall, the interplay between consumer concerns regarding the duration of geopolitical conflicts and their financial expectations underscores the significant role that ongoing military tensions play in shaping economic sentiment across the euro area.