The FINANCIAL — Unlike the weather, the mood among German consumers in early summer 2016 is bright. The overall consumer climate indicator is forecasting 10.1 points for July compared with 9.8 points in June. Economic and income expectations are markedly on the up, while willingness to buy fell slightly.
Consumers expect the German economy to be in good shape over the coming months. This has resulted in a considerable increase in economic expectations this month. Given this outlook, income expectations have reached their highest level since German reunification. Only willingness to buy is slightly down, but is still at a very strong level.
Consumers’ economic outlook considerably brighter
The economic expectations of German citizens have improved considerably in June. The indicator has gained 9.7 points to reach a total of 18 points. This represents the third increase in a row, and the highest value since June 2015, when the indicator stood at 18.4 points. There is currently a clear upward trend.
Consumers clearly see a bright future for the German economy, their spirits are as of yet undampened by discussions surrounding the possible impact on the German economy of the UK leaving the EU. The British referendum on leaving the EU on June 23 has not yet affected economic mood as the survey had already been completed at this point. However, it is expected that the current uncertainty in the financial markets will also be felt by German consumers. The extent to which the decision will impact the consumer climate in the coming months also depends on how serious the financial implications will be and how discussions develop within the European Union.
For Germany, however, employment developments are the most important pillar of the economic indicator – and the number of employees is continuing to rise. According to the Federal Employment Agency, the figure stood at 43.4 million in April, the highest number since German reunification.
Income expectations at their highest level since German reunification
In light of the improved economic outlook, income expectations are also rising considerably this month. The indicator has gained 7.8 points, more than making up for the losses experienced in the previous month. With 59.6 points, it is at its highest level since German reunification. GfK has been carrying out the study across the whole of Germany since 1991. The indicator has not achieved a higher level since then.
Consumers are very optimistic about developments in their income. The good employment market is significantly boosting negotiated income in many sectors. This is shown by the wage agreements made in the public sector, metal and electrical industries and chemicals industry. Furthermore, the state pension is set to increase considerably from July 1.
And with the inflation rate also at almost 0 percent, nominal income growth is rising at a virtually identical rate to purchasing power.
Willingness to buy falls slightly
In June, willingness to buy failed to match its 12-month high from the previous month. The indicator has fallen by 3.3 points to 54.4 points. Despite these losses, there is still a slight upward trend.
As such, willingness to buy continues to look bright. An excellent employment market has virtually eliminated employees’ concerns about job losses. This means that they are more likely to make expensive purchases than save their money. Due to low interest rates, the alternative to consuming is not appealing.
Furthermore, the interest rate is not expected to change dramatically in the near future – quite the opposite in fact. The return on 10-year federal bonds even fell below 0 percent recently for the first time. In specific terms, this means that those who lend money to the German state would actually have to pay a fee. This should continue to boost propensity to consume.
Consumer climate increases considerably
The overall indicator is forecasting 10.1 points for July 2016 compared with 9.8 points in June. Consumer climate is therefore showing a continued upward trend, underpinning consumption’s position as an important pillar of Germany’s economic development. GfK confirms its forecast that real, private consumer spending would rise by around 2 percent this year.
The good consumer climate is predominantly thanks to excellent domestic conditions, such as high levels of employment, excellent income development and virtually nonexistent inflation.
However, domestic demand is also subject to risks, above all on an international level. It remains to be seen how Brexit will affect the European economies, and above all the German economy. If it causes longer term uncertainty in the markets as well as political uncertainty in both the EU and the individual member states, Germany in particular, this may also have a negative impact on consumer sentiment in Germany. Added to this, further international crises, particularly in the Middle East, and related to this the refugee crisis, are far from being resolved. Should these crises escalate, this would damage the consumer climate to the same extent as an ongoing weakening global economy.
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