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Why income growth in Europe is still weak, but could pick up soon

Xun Yao Chen

Macro European indicators influence restaurant companies' sales (Part 5 of 12)

(Continued from Part 4)

Disposable income in a downtrend

Disposable income for major European countries is still in a downtrend, with France and Germany both seeing growth fall from peaks of ~3.5% to close to 0% recently (the first quarter of 2013 for France and second quarter of 2013 for Germany). This is to be expected since the gross disposable income depends on employment growth. So the two indicators correlate highly with each other. When employment growth is high, gross disposable income is naturally high as well.

Possible turnaround emerging

As we’ve seen, employment growth among Eurozone members was in a downtrend but could be turning around soon. If this happens, then gross disposable income for countries such as France, Germany, and other Eurozone members like Italy and Spain could see higher growth ahead, which will increase the market size for the restaurant industry.

Lag due to untimeliness

Although it’s very relevant to restaurant sales, the disposable income published by European countries isn’t as useful as it is compared to other indicators that we’ll show later. First, like the employment indicator, the data is released every quarter—unlike monthly updates in the United States. Second, the data lags by a quarter, which makes it even more of a lagging indicator. So investors should use the disposable income figures published by European countries as confirmation rather than seeking turnarounds.

Disposable income data in the United States isn’t lagging

Note that the lag only applies to European countries and the same can’t be said for the United States, which has one of the most updated and largest collections of data in the world. Data for disposable personal income, for example, is updated on a monthly basis—so it only lags by a month. This makes it more suitable as a coincident indicator than a lagging one. But, although the United States has been performing well, its growth has also been decelerating since it peaked in 2011. So while it isn’t completely negative for restaurants such as McDonald’s and Yum! Brands, it will unfavorably affect earnings and share price growth.

Continue to Part 6

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