The FINANCIAL -- Excellent consumer sentiment will not continue unabated in September. Both income expectations and propensity to buy decreased. On the other hand, economic expectations increased slightly. GfK forecasts a decrease in consumer climate for October of 0.1 points in comparison to the previous month to 10.8 points.
However, consumers believe that the German economy's solid growth trend is set to continue in fall. Therefore, economic expectations will also increase after losses from the preceding month. In contrast, the previous five-month upswing in income expectations ceased in September. Propensity to buy also suffered due to the downturn. However, both measures remain at their current high levels so that a slight trend reversal downwards can be viewed more as a stabilization process.
Economic expectations increase
After the setback of the preceding month, income expectations in September stabilized and increased moderately. With an increase of 3 points, the indicator compensates for part of the decrease from August. It currently stands at 33.4 points. The indicator's clear increase of 26.6 points in comparison with the preceding year can also be viewed as a clear indicator for the continuing positive economic sentiment.
Germans still view their economy as being on the upswing and the employment market regularly sends positive signals. The unemployment rate has continued to drop while the working population has carried on growing. According to forecasts by economic experts, more than a half-million employees should be added in this year alone. Currently, the workforce totals more than 44 million people, which is the largest number ever in the post-reunification era. This strength is also trickling over into the growth figures for the gross domestic product. According to figures from the German Federal Office of Statistics, the adjusted calendar figures (taking into consideration of the difference in the number of business days) for the second quarter show GDP growth of 2.1 percent in comparison with the preceding year, after growing by 2.0 percent in the first three months of the year.
Income expectations: record pace comes to an end
The months-long record pace of consumer income expectation finally came to a halt in September, at least initially. After five consecutive increases, the income indicator finally took a hit, losing 8.7 points. Still at a considerably high level of 52.7 points, it has nearly achieved the previous year’s level exactly (September 2016: 52.6 points).
Therefore, in spite of the drop-off, the income expectation level remains high. In view of the excellent employment market situation, the Germans are assuming that they will also have to record significant increases in income. The German Federal Office of Statistics supports this optimism. According to a recently published report, real wages have increased by 1.2 percent for the second quarter of 2017 in comparison with the same quarter in the preceding year. In comparison with the first quarter of the year, this doubles the growth rate because the increase amounted to 0.6 percent from January to March of 2017.
Since legal pensions in Germany are based on the changes in employee wages, retirees are seeing considerable growth in their earnings. They can then support the income indicator as well.
Consumer mood at very high levels
Despite minimal declines, propensity to buy also maintained exceptional levels in September as well. The indicator lost 1.1 points and is currently showing 57.0 points. In comparison with the preceding year, the numbers indicate an increase of plus 4 points.
Thus, German consumers continue to be in a good buying mood. When an employment market is at its best, it ensures the employees do not have to fear for their jobs. This leads to increased planning security, especially when planning major purchases or expenditures, even if doing so might require applying for a loan.
In combination with good employment numbers and significant increases in income, the exceptional buying mood will also trickle over to peoples’ purchasing behaviors. Thus, retail revenues increased in July by 4.2 percent in comparison with the previous year (real: 2.7 percent) according to figures from the German Federal Office of Statistics. The fact that retailers were able to increase sales by 4.6 percent (real: 2.8 percent) in the first seven months proves that this was not a passing fad.
Consumer climate: first decrease after five consecutive increases
Following on from 10.9 points in September, GfK is predicting a decrease to 10.8 points for October. Thus, the indicator must allow for slight losses after five consecutive increases. Regardless, however, consumer sentiment remains in good shape. The domestic economy will therefore continue to contribute significantly to overall economic development in Germany.
GfK confirms its forecast made at the start of the year, whereby real private consumption will increase by about 1.5 percent this year.
Despite the excellent domestic situation, this situation is not without difficulties. Internationally, a number of risks are threatening to impact the economic situation in Germany. The tension regarding North Korea’s atomic program has been increasing; Brexit negotiations are progressing slowly but surely; and other regions in crisis like Syria and Iraq are still in flux. In addition, how the US government will position their trade policy in the future remains unclear. Increases in their protectionist tendencies would also affect exporters, like Germany. In this case, consumer economics could also expect to be negatively impacted.