The FINANCIAL — The mood of German consumers shows a mixed picture in May. The overall consumer climate indicator is forecasting 9.8 points for June compared with 9.7 points in May. While economic expectations and the propensity to buy have both increased, income expectations have suffered losses.
Consumers still believe that the German economy will continue to grow moderately over the next few months. This has resulted in a slight increase in economic expectations this month. The already very high propensity to buy has also climbed to an even greater level. Although the income expectations indicator is the only index to experience a loss, it still remains above the 50-point mark, according to GfK.
Consumers are confident of moderate economic growth
Economic expectations have continued to rise in May. However, this month’s increase of 2 points is rather modest in comparison to the noticeable growth seen in April. The indicator currently stands at 8.3 points, meaning it has climbed even further above the negative range.
This growth has reinforced the upward trend recorded by the income expectations indicator. Consumers are assuming that the German economy will continue to achieve positive growth, even though the rates of increase are expected to remain rather moderate.
Consumers have been encouraged by the latest data to be released by the German Federal Statistical Office, which claimed that in the first quarter of 2016 gross domestic product (GDP) rose by 0.7 percent compared with the same quarter the previous year. Economic growth has therefore picked up even more momentum. By way of comparison, in the last quarter of 2015, GDP increased by 0.3 percent compared with the same period the previous year.
Domestic growth is currently most responsible for boosting the economy. According to the German Federal Statistical Office, the dynamic economic development can be attributed to the increased amount of both private household and government spending at the beginning of the year.
Income expectations indicator loses the majority of the gains made in April
While economic expectations have increased, income expectations have suffered losses this month. The indicator has fallen by 5.7 points to 51.8 points, losing a significant proportion of the gains it enjoyed in April. Nevertheless, income expectations remain very high above the 50-point mark.
In spite of its recent losses, the income expectations indicator is still at an outstanding level. The noticeable increases in income can be ascribed to the stable employment market, the strength of which is also evident from the wage agreements made following recent negotiations in the metal and electronics industry. These negotiations resulted in a wage rise of 2.8 percent this year, a one-off payment of 150 euros and an additional increase of 2 percent next year. Furthermore, the state pension is due to increase considerably from July 1.
Another positive factor this year is the low rate of inflation, which, according to figures from the German Federal Statistical Office, stood at minus 0.1 percent in April. This has resulted in a noticeable rise in the amount of disposable income available to both workers and pensioners.
Propensity to buy climbs to a 12-month high
In contrast to income expectations, the propensity to buy indicator has once again improved on its already very high level. Having gained 2.3 points, it has climbed to 57.7 points, which represents a 12-month high. This is the highest level to be recorded since May 2015, when the indicator stood at 62.6 points.
Consumers are still very willing to make purchases. The indicator has presumably benefited from the debate surrounding negative interest rates, which have been sparked off yet again by the monetary policy of the European Central Bank. The widespread introduction of negative interest rates would mean that instead of receiving interest for their deposits as is conventionally the case, savers would have to pay fees in order to keep their money with their bank. A number of banks already charge negative interest rates to businesses with relatively large credit balances.
The very strong labor market, a noticeable rise in real income, and stable prices are also currently boosting consumers’ willingness to spend.
Consumer climate continues its upward trend
The overall indicator is forecasting 9.8 points for June 2016 compared with 9.7 points in May. The consumer climate is still experiencing an upward – albeit it slightly dampened – trend.
In light of this, private consumption will remain an important pillar of the German economy over the next few months. GfK therefore still stands by the forecast it made at the start of the year that real private consumer spending will climb by around 2 percent in 2016. This figure stood at 1.9 percent in 2015.
Despite the excellent conditions in place for domestic demand, in terms of the labor market, income and inflation, for example, there are a number of uncertainties that should not be underestimated. One example is the threat of Great Britain leaving the European Union if the country’s referendum on the matter, which is due to be held in June, leads to the so-called “Brexit.” If this should come to pass, it is feared that it will also cause a sense of insecurity among German consumers about the economic future of the European Union. This would also have a negative impact on consumer sentiment.
The negotiations on Greece’s debt crisis are also set to continue over the next few months. Failure to reach an agreement on further financial support for the country may also have a detrimental effect on Germany’s consumer climate.
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