The main consumer climate indicators signal that the consumer climate is unlikely to improve much more this year in Germany. Although the propensity to buy remains high, the positive sentiment regarding economic development is increasingly abating.
Based on the indicator values, GfK is forecasting a rise in private consumption in 2006 of 0.7% compared to the prior year.
The East-West comparison shows that consumers in Eastern Germany continue to have considerably lower expectations for their income prospects than their counterparts in Western Germany. The difference is not so great for economic expectations and the propensity to make larger purchases in the near future is almost equally optimistic in East and West.
Economic expectations: optimism crumbling
Uncertainty regarding future economic development in Germany is increasing among consumers. In August, the indicator dropped a good 4 points compared to the prior month and now stands at 11.4 points. This is 23 points higher than in August 2005.
Although the indicator has fallen for the third time in a row, it would be too early to interpret this as a sign of an imminent downturn in the economy. However, it does show the consumers are obviously assuming that the pace of economic growth is set to slow in the coming months. Their skepticism is aimed at the coming year when private households will come under greater pressure due to the increase in value added tax and the abolition of tax breaks such as the flat-rate commuter allowance and tax-free allowance. The reduced optimism is also likely to be the result of the fact that people were recently unhappier with the performance of the government. The nature and speed of implementation of the necessary reforms were perceived to be unsatisfactory.
Despite rising skepticism, consumers and companies (ifo business climate) alike certainly do not rate future economic development as pessimistically as the financial analysts (ZEW economic expectations), who are anticipating a considerable downturn in the economy over the next 6 months.
Income expectations: stagnation at a lower level
Income expectations in August remained unchanged on the prior month. As before the indicator stood at minus 3.8 points and was therefore below the long-term average of zero. Compared to the prior year, the indicator is almost 7 points higher.
The positive news from the labor market, which according to experts indicates a positive trend reversal, has obviously not yet impacted on the income expectations of German consumers. Consumer income expectations continue to lag behind economic expectations. This reticence is understandable. The expected financial burden on private households gives scant reason for them to be more optimistic about their income prospects. However, a notable upturn in the labor market over the next few months is likely to boost income development. The extent to which this will be able to compensate for the additional burdens remains to be seen.
Propensity to buy: remains at record levels
The inclination of consumers to make larger purchases in the near future remains extremely positive in August as well. However, the indicator was 1.4 points down on the previous record month of July. At 56.1 points, however, this is the second highest figure ever recorded. The indicator is over 60 points higher than the same month in 2005.
The main driver for the extremely high level of the propensity to buy indicator is the imminent increase in VAT. Whether this positive sentiment will translate into actual purchases in full, however, is doubtful given weak income expectations. Alternatively, the intended purchases could be financed by consumers cutting back on savings. It is likely that the savings ratio will therefore further reduce this year.
Consumer climate: still slight positive upward trend
As a result of the high level of the propensity to buy indicator, the consumer climate is slightly up again on the prior month. After the revised figure of 8.5 points, in August the indicator is forecasting 8.6 points for September.
To stabilize the consumer climate in the long term, especially in view of the imminent financial burdens, consumer purchasing power, in particular, needs to be strengthened. The basis for this is a clear and sustained improvement in the labor market. At the same time, the reform measures introduced must be consistently implemented in order to rebuild people's slowly crumbling confidence in the coalition government.
The survey
These findings are extracts from the comprehensive "GfK consumer climate MAXX" survey, which is based on around 2,000 consumer interviews conducted each month on behalf of the EU 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 next publication date will be September 27, 2006.
The table below provides an overview of the individual indicators:
| Economic outlook | This index is based on the following question to consumers: How do you think the general economic situation will develop in the next 12 months?' (improve - stagnate - deteriorate) |
| Income expectations | This index is based on the following question to consumers: How do you think the financial situation of your household will develop in the next 12 months?' (improve - stagnate - deteriorate) |
| Consumption and buying propensity | This index is based on the following question to consumers: Do you think it is advisable to make major purchases at the moment?' (good time - neither good nor bad time - bad time) |
| Consumer climate | This index is used to describe private consumption. Key factors are income expectations and buying propensity. The economic outlook has a more indirect effect on the consumer climate, generally as a result of income expectations. |