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News : EU Economy Last Updated: Mar 26, 2014 - 10:23 AM


German consumer confidence remains at a seven-year high
By Finfacts Team
Mar 26, 2014 - 10:21 AM

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German consumer confidence remains at a seven-year high, according to a monthly survey Wednesday, but a further escalation of the crisis in the Ukraine would likely dent consumer sentiment in Europe's largest economy.

The consumer mood in Germany was once again buoyant in March, but there was little in the way of a clearly discernible trend according to GfK, a market research firm. Whilst economic expectations and willingness to buy increased, income expectations fell. Following 8.5 points in March, the overall indicator is again forecasting 8.5 points for April.

On the whole, the consumer mood appears to be remaining at a decent level.  Willingness to buy improved once more on its already very high level in the previous month. As the slight increase in economic expectation demonstrates, consumers in Germany still believe that the economy is on the road to recovery. However, the record level of income expectations from the previous month was not quite maintained. Propensity to save recovered from its record low – at least for the time being – and registered a significant increase.

Economic expectations: further improvement: Following the slight setback in the previous month, the economic outlook of consumers in March was back on the road toward recovery. The indicator gained 1.3 points and is currently at 33.2 points. The upward trend has therefore somewhat strengthened, which is also evident when comparing with the previous year’s figure: the economic indicator has registered a notable increase of 32.6 points.

Germans believe that their economy is still on the up. Favorable growth expectations for the world economy with improved export prospects, as well as continued low interest rates in Germany will help to gradually stimulate the propensity to invest, which has been flagging up to now. In this way, investments will lend a broader basis to the upturn and support the economy.

GfK says it remains to be seen just how the current events in Crimea will affect the mood amongst consumers. The latest escalation of the crisis involved a Russian-led referendum and subsequent annexation of the Crimean peninsula. However, this occurred after this survey had been conducted and therefore did not impact the results. However, it cannot be ruled out that this event will unsettle consumers in the coming weeks, particularly with regard to their economic outlook, especially if the Crimean crisis were to spread to other parts of the Ukraine, leading the Western allies to react with more stringent sanctions. In this case, a negative effect on the consumer mood would be very likely.

In contrast to consumers, the events in Crimea appear to be affecting businesses already, as after four consecutive monthly increases, the Ifo Business Climate Index fell slightly in March.

Income expectations: record value not quite maintained: Income expectations did not quite match the record value, which was achieved in the previous month. The indicator dropped three points and now stands at 45.6 points. Nevertheless, the mood relating to income remains at a very high level.

There is certainly some justification for this ongoing optimism among consumers. A stable situation on the labor market, which has seen further small increases in employment levels, is nourishing hopes of more strongly increasing collective income. These hopes are currently reflected in the income indicator. It seems that the pay talks for this year will result in an increase of three%, if not slightly more.

Retirees are also set to profit from the positive developments regarding wages. According to the data currently available from the Destatis, the federal statistics office and the Deutsche Rentenversicherung (German statutory pension scheme), state pensions should increase by 1.67% in West Germany and by 2.53% in the new federal states in July. Assuming there is a moderate inflation rate of 1.5% in 2014, this means that retirees will benefit from real increases in income.
 
Willingness to buy: still going strong: The level of willingness to buy is still flying high. Following a small decline in the previous month, the indicator has once again registered a clear gain. After an increase of 6.6 points, it is now at 55.5 points in total. This means that the upward trend which first started in early 2013 has been sustained.

The determining conditions for willingness to buy, such as a stable labor market, good income development and a moderate rate of inflation, continue to be favorable. The ongoing low interest rate is also helping support the willingness of consumers to buy.

However, this extremely good propensity to buy is currently only having a partial impact in the retail sector. The service sector is profiting much more as it is meeting the higher demand for renovations and vacations, for example. In addition, from the continued high rate of planning permission, it can be concluded that further considerable resources will flow into the property sector.

Consumer climate: stabilisation: Following 8.5 points in March, the overall indicator is again forecasting 8.5 points for April. The findings suggest that the consumer climate is taking a breather.

Private consumption will therefore once again be a reliable pillar of the economy this year. GfK confirms the prediction published in February, whereby the total expenditure on private consumption would grow by 1.5% in real terms. This would mark a clear improvement on 2013, as according to the data available to date from the Federal Statistics Office, consumer growth of scarcely one% is on the cards for the year as a whole.

The results are an excerpt from the “GfK Consumer Climate MAXX” survey, which is based on around 2,000 consumer interviews conducted each month on behalf of the European Commission. The GfK Consumer Climate survey has been conducted since 1980.

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