German consumer sentiment increased to 8.7 points in December and is expected to rise to 9 points in January, says the GfK Group, Germany’s largest market research institute.
It appears that German consumers’ willingness to buy as well as their economic expectations are improving, although their income expectations have fallen.
GfK says consumers in Germany believe that the current phase of economic weakness in their country will pass, and that robust GDP growth will resume in the months to come. This is reflected in the sizable spike recorded in this months’ economic expectations.
Households’ willingness to consume, which was already at a high level, has further improved in December, unlike income expectations. People’s **propensity to save has hit record lows, which has further contributed to the improvement in the consumer climate.
** Propensity to save is a measure of what percentage of a person’s income is saved. Propensity is a common word in economics, and can be used for consumption, saving, spending on imports/exports, etc.
Economic expectations: the downward trend reverses
After declining for five months running, German consumers’ economic expectations increased sharply in December. The indicator has risen by 12.9 points to 14.5 points, compared to a long-term average of zero points.
Despite much improved expectations, a degree of uncertainty still prevails. The ongoing crises in Syria, Iraq, Ukraine, plus the West African Ebola epidemic are still weighing on the German economy.
However, evidence is clear that consumers expect the economy will rebound fairly rapidly and return to growth by the second quarter of 2015.
Several forecasts are pointing to a strong economic recovery in 2015. The prestigious Munch-based Ifo Institute forecasts GDP growth of 1.5% for 2015.
The Ifo Business Climate Index showed that German companies have become more optimistic about the future.
Income expectations down
After rising for two successive months, income expectations declined in December by 7.5 points to 41 points, the lowest level since December 2013 (39.5 points). Nevertheless, the current 41 points is still “an extremely good level,” GfK added.
The December fall is much more likely to be due to the ongoing, delicate international situation rather than the framework of conditions at home.
From the consumers’ point of view, conditions in Germany continue to be favorable. Employment has been rising for several consecutive months, incomes for both workers and retired Germans have increased, which viewed in an environment of ultra-low inflation (below 1%) means purchasing power has improved.
Willingness to buy increases further
The indicator for willingness to buy rose 1.6 points to 49.1 points, which is a 5-month high.
People’s willingness to buy is being driven mainly by a sharp drop in energy prices, which has left households with much more spare cash. This is great news for the retail sector in the run-up to Christmas.
Germans’ lower propensity to save has also boosted the spending mood.
The consumer climate, with an indicator likely to hit 9 points in January, will enter the new year in a strong position, which bodes well for the whole of 2015.
GfK wrote in a press release:
“Accordingly, private consumption will continue to play a major role in the predicted upturn of the German economy in the coming year. However, any potential escalation of international crises may pose a threat to the consumer economy and therefore also for economic development in Germany as a whole.”