As summer finally arrived in Germany, it was not just the temperature but also the mood of consumers that was rising this month. The continued stability of employment prospects and a moderate rate of inflation caused optimism to rise once more in July. This benefited both economic and income expectations. Willingness to buy again improved on its already high level and reached an 18-month high in July.
Economic expectations: moderate recovery continues
The economic expectations of German consumers increased for the third consecutive month in July, improving by 3.2 points. The indicator is therefore currently at 4.3 points and stabilizing at a positive level, above the zero threshold which signifies the long-term average.
Since the end of last year, the economic outlook has been on an upward trend, although there is still considerable room for improvement in the indicator value. The fact that the level is currently only slightly above average suggests that the recovery of Germany’s economy will be rather sluggish and is also likely to suffer some minor setbacks. The persisting recessions in a number of eurozone countries are currently also preventing a more rapid improvement in the economic situation in Germany.
In addition, it seems that government intervention to settle the overheating banking sector has caused growth momentum in China to begin slowing down slightly. This could potentially also impact the export prospects of the German economy.
As was the case for consumers’ economic outlook, the ifo Business Climate Index for industry in Germany increased for the third consecutive time. Companies in Germany are taking a more positive view of the current business situation in July than they did in the previous month.
Income expectations: clear upward trend
The improved economic outlook also caused income expectations to rise considerably in July this year. After an increase of 6.6 points, the indicator is currently at 42.8 points, which is already the fourth consecutive increase. A higher value was last recorded more than two years ago in June 2011, when the indicator reached 44.6 points. There has been an upward trend in income expectations since the end of last year.
The stable labor market is the main reason for this extremely optimistic view of personal financial development. Germans are in a relatively comfortable position when compared to the rest of Europe. Germany is the only European country in which unemployment has fallen significantly since before the crisis in 2007. The actual income situation has also improved for many as a result of the stable employment situation. This is reflected in the good collective bargaining agreements of recent months, with increases of around 3 percent. Against a background of inflation, this is boosting the purchasing power of the labor force. However, pensioners in Western Germany are not experiencing the benefit this year as there will be virtually no change in the amount of their statutory pensions, which were only increased by a meager 0.25 percent.
Willingness to buy: extremely good level improved again
Willingness to buy also profited from the generally rather optimistic consumer mood in July. The indicator increased a further 4.2 points at an already high level. At 40.7 points, the 40-point mark has therefore been surpassed for the first time since January 2012, which is the last time the indicator reached a higher value of 41.8 points.
The majority of consumers continue to think it advisable to make major purchases. Interest is at such historically low levels that traditional investment options are not even close to offsetting the rate of inflation. It is therefore currently not very appealing for consumers to save or invest money.
Instead, consumers are showing a preference for “concrete gold” by investing their money in real estate. In wake of this, businesses in the furniture sector are currently doing well as are those in the field of renovations, especially energy-saving refurbishment. Real estate acquisition and renovations are also benefiting from extremely attractive mortgage interest rates.
Consumer climate: upward trend continues
Following a value of 6.8 points in July, the overall indicator is forecasting 7.0 points for August. A higher value was last recorded before the crisis in September 2007 when the indicator was at 7.3 points.
Private consumption is therefore confirming its important role as a reliable pillar for the German economy. In the first quarter of the year, the good consumption situation prevented Germany’s gross domestic product being negative for the second consecutive time, which by definition would mean a return to recession for the country.
As it can be assumed that both export developments and companies’ propensity to make investments will be rather restrained this year, consumption will play an even more important role. Almost 60 percent of gross domestic product is attributable to private consumption. GfK confirms its forecast issued at the start of the year that such spending will increase by around one percent in real terms in 2013.
However, the assumption of positive developments in private consumption this year is not without risk. The main dangers are outside Germany and above all depend on how the debt crisis progresses. If the situation escalates noticeably, consumer optimism would be affected and the consumer climate would also suffer as a result.
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 report contains charts, forecasts and a detailed commentary regarding the indicators. In addition, the report includes information on proposed consumer spending in 20 different areas of the consumer goods and services markets. The GfK Consumer Climate survey has been conducted since 1980.