The German Gfk marketing research organization reported today that the consumer mood in Germany improved again significantly in May. This applies to the economic outlook whose indicator reached a level last recorded in early 2001 as well as the propensity to buy indicator, which climbed to a record high. Consumer expectations in terms of their own income situation only improved in western Germany.
The positive trend in the individual indicators also impacted favorably on the consumer climate indicator. Following a revised 5.8 points in May, the forecast for the overall indicator for June is 6.8 points.
With the long winter coming to an end, the consumer mood is noticeably brighter. The low of recent years finally seems to be over and the propensity to buy indicator reached a historic high in May. Trust in a positive development of the German economy has also increased considerably. Although moderately, personal income expectations have also improved.
There are several reasons for the current optimism among consumers. There great confidence in the government and the collective agreements concluded in the metal industry and electronic engineering sector, which are favorable from the point of view of employees, indicate a general improvement. In addition, there is a greater awareness of price rises expected following the VAT increase due at the beginning of 2007.
In contrast with consumers, financial analysts (ZEW) and entrepreneurs (ifo) have a more skeptical view of the economy this month. The economic outlook indicator established by ZEW and the ifo business climate index were both slightly down on the prior month. Nevertheless, these indicators remain above the long-term average.
Economic outlook: optimistic attitude is spreading
The trend in consumer expectations with regard to the economy is clearly upward in May after its rather hesitant development up until last autumn. The indicator climbed 8.7 points to 30.9 points. Compared with the corresponding figure for the prior year, this represents a rise of a good 47 points. Consumers in eastern and western Germany expressed a much more positive attitude than in the prior month.
The growing optimism among consumers is probably due in part to the positive view of the current economic trend in Germany provided by the experts. Expert forecasts for economic growth this year were revised upwards. As in prior years, however, experts consider the buoyant export activities of German industry to have a decisive impact on the economic upturn. In addition, rising private consumption is likely to make a positive contribution towards an economic recovery alongside investment linked to domestic demand. Last year, private consumption stagnated.
Income expectations: positive in western Germany, negative in eastern Germany
With regard to their own income expectations, consumers have tended towards a cautious attitude since the beginning of the year. In May, however, the indicator rose by 5.7 points, exceeding the long-term average of zero to stand at a current 5.2 points. This means that the indicator is 18.5 points above the prior year’s level. This positive trend in May is purely attributable to the higher income expectations of consumers in western Germany. While the indicator in this part of Germany rose by over 13 points to almost 17 points, the same indicator for eastern German consumers was down by over 11 points to -24.
The improved mood among western German consumers is likely to be mainly the result of the collective agreements in the metal industry and electronic engineering sector in western Germany, which are favorable for employees. Evidently, consumers believe that these will affect negotiations in other sectors positively. Conversely, the ongoing discussion about pensions in the future, healthcare reforms and energy prices seem to be less relevant.
Propensity to buy: at a historic high
The willingness to buy larger items in the near future rose again considerably in May. Compared with the prior month, the indicator climbed 15.3 points to 49.8 points. This puts the indicator 71 points up on the prior year’s level and represents a record high.
The apparent cause for the increase in this indicator is the widespread debate about the rise in VAT. It is likely that as a result, some consumers will make the purchases they were planning to make anyway this year instead of waiting.
This is confirmed by a GfK study carried out at the beginning of April this year, during which 2,000 Germans were asked whether they were bringing forward any purchases due to the imminent VAT increase. According to the findings of the study, a good 13% plan to do precisely this. Almost 40% were undecided. 47% thought that they would not bring forward any purchases because of the expected VAT rise. In addition to home improvements, right at the top of the shopping list of those who intend to make major acquisitions this year is the purchase of furniture, domestic appliances and consumer electronics.
Consumer climate: upward trend stabilizes
The overall consumer climate indicator also improved significantly. Following a revised 5.8 points in May, the forecast for June is 6.8 points. The indicator last achieved such a high level at the end of 2001.
The most important reason for the positive overall mood reflected by this indicator is the sharp rise in the propensity to buy. It is evident that in view of the VAT increase scheduled for January 1, 2007, consumers are willing to bring forward any major purchases they were planning. This factor dominates all the others that are relevant to the consumer climate indicator.
Irrespective of how positive an impact this renewed consumption and buying propensity is having at present, its subsequent effect needs to be critically assessed. The question is whether the start of 2007 will once again be marked by persistent reticence to buy, or whether private consumption will provide the necessary impetus for the German economy to continue its growth trend. The decisive factor here remains the situation in the employment market. Only once this has eased and it is more likely that unemployment figures can be brought down significantly, will consumers be more confident about their financial future and this will in turn result in a basic positive consumer mood.
The study
These findings are extracts from the “GfK consumer climate MAXX” study, 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
