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News : EU Economy Last Updated: Aug 27, 2014 - 10:38 PM

German consumer confidence in biggest plunge since at least 1980
By Michael Hennigan, Finfacts founder and editor
Aug 27, 2014 - 9:06 AM

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German consumers have become less optimistic this August and following a revised value of 8.9 points in August, the overall consumer confidence indicator is forecasting 8.6 points for September. When compared with the previous month, both income expectations and willingness to buy have fallen slightly, while economic expectations completely collapsed in light of the intensified state of international affairs. The slump in sentiment is the highest since at least 1980 when GfK the market research group began tracking sentiment.

The escalation of the situation in Iraq, Israel and Eastern Ukraine as well as the gradually accelerating spiral of sanctions in Russia have now also had a negative impact on the previously extremely optimistic economic outlook of Germans. Uncertainty with regard to the continued economic developments in Germany has increased quite considerably. In contrast, income expectations and willingness to buy have so far remained relatively robust. While there has been a decline in the wake of the drop in economic expectations, these indicators have largely maintained their already high level.

Economic expectations: greatest slump since 1980: Gfk says consumers are increasingly taking the intensified geopolitical situation into consideration in their assessment of how the German economy will develop over the coming months. The indicator dropped by 35.5 points, plummeting to 10.4 points. A decline of this magnitude in just one month has not been recorded since the survey began in 1980. Consequently, virtually all improvement in the economic expectations indicator over the past year has been negated in one fell swoop. In August 2013, the indicator value was 1.8 points.

Consumers are expecting the economy to shift down a gear or two at least. Given that no long-term solutions appear to be on the cards yet for any of the crises, uncertainty is rising in the population on the potential consequences for the German economy. In particular, the sanctions against Russia, which are already significantly impacting exports, could become a real risk for the German economy. 

The first provisional figures from the Destatis, the federal statistics office on GDP in the second quarter indicate that weakening exports and investments are the primary cause of the decline of 0.2 percent in economic performance in comparison with the previous quarter.

A further deterioration in the economy is also expected by German companies, as is reflected in the latest Ifo Business Climate Index, which fell for the fourth consecutive time, dropping to the lowest level since July 2013.

Income expectations: record value not maintained: The fact that income expectations did not maintain the record level of the previous month is primarily attributable to the collapse in the economic outlook. The indicator dropped by a moderate 4.6 points and now stands at 50.1 points. It therefore continues to be at an extremely high level.

Evidently the continued stability of domestic framework conditions, such as the steady employment situation, good income development and low inflation, are ensuring that the severely deteriorated economic optimism is only having a very limited impact on the income outlook. Unemployment appears to be stabilizing this year, at just under three million, and employment is even rising slightly. In conjunction with a moderate rate of inflation, this is resulting in real increases in income for both employees and recipients of statutory pensions.

Willingness to buy: maintaining extremely high level: Willingness to buy continued to be highly robust in August. Although the indicator fell by 1.7 points, the spending mood has remained at an extremely high level. The indicator currently stands at 49.3 points and has therefore still increased by almost 5 points in comparison with the corresponding period of the previous year.

To date, GfK says the collapsing economic mood has not had much of an impact on the propensity to consume. At present, consumers seem to be basing their judgment on stable employment conditions as well as the low rates of inflation and interest, rather than the ever more unstable international environment. However, the marked increase in the propensity to save in August could be a first indication that consumers will be more cautious in the coming months and that the momentum for spending will subside somewhat.

These findings are extracts 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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