German consumers are more pessimistic and more likely to focus on savings, revealing they expect to make fewer big purchases in July.
Germany’s GfK Consumer Sentiment Index for July was released on Wednesday morning. According to data jointly released by the GfK Group and the Nuremberg Institute for Market Decision-making (NIM), the index came in at -21.8, down sharply from -21.0 in June. This was well below the -18.9 forecast by analysts and the first drop in five months.
Income expectations fell sharply to 8.2 in July from 12.5 in June, while economic outlook also plummeted to 2.5 from 9.8 — a sharp reversal from the previous four months, when these two indicators had been trending upwards.
Consumers also indicated they were leaning more towards saving, with the Savings Propensity Index rising to 8.2 in July from 5.0 in the previous month. Perhaps not surprisingly, the propensity to buy or buy in bulk also remained weak, falling from -12.3 to -13.0.
“The recent interruption to the upward trend in consumer sentiment shows that breaking out of sluggish consumption will be difficult and that a setback is always possible,” Rolf Buerkl, head of consumer environment at NIM, said on the company’s website.
“The slight increase in German inflation in May highlights renewed uncertainty among consumers, which is also reflected in increased willingness to save. For a sustained recovery in consumer confidence, consumers need planning certainty, essential especially for large household purchases, in addition to existing real income growth.”
“And this sense of relief will only return if price pressures subside further and consumers are given a clearer outlook for the future. This also means that the Government must quickly and clearly communicate the burdens and relief people will face as a result of upcoming budget discussions, so that significant real income gains are delivered and consumers are motivated to spend more.”
German economy shows signs of recovery
German consumers are understandably still cautious given months of rising interest rates, soaring inflation and an uncertain economic situation, but a recent May report from the Bundesbank highlighted that the German economy may be on the road to recovery.
This is mainly due to improved weather conditions, which have a major impact on the construction sector. According to the May monthly report, “In the first quarter of 2024, growth was recorded especially in the construction sector, but also in the industrial sector and possibly also in the services sector.”
“This is largely due to favorable weather conditions for construction activity. In contrast, the previous quarter saw unfavorable weather conditions for construction, which contributed to the large fluctuations currently being seen in the construction industry.”
Germany’s energy-intensive sector has also seen a positive turnaround with production increasing strongly over the past few months due to lower energy prices. The German labor market is also strong and wage growth is expected to remain robust in the near future.
However, slowing inflation remains a concern, falling at a slower pace than expected, raising concerns about whether the European Central Bank (ECB) can maintain its current rate-cutting course.