Consumer sentiment is swinging: optimism is burgeoning

Results of the GfK consumer climate study in February 2004

After two months of predominantly negative development of the indicators that describe the consumer mood of German citizens, this seems to be changing. Both the economic and income expectations of Germans have become more positive. In addition, their willingness to make larger purchases in the near future has also increased.

In January, German consumers still felt unsettled by the discussions about social security and, after already pessimistic reactions in December, reacted predominantly negatively for the second time in a row: their expectations of the development of the economy and their personal income as well as their inclination to make larger purchases to make, declined. In the February survey by GfK, however, a turnaround can be seen again for the first time: All sentiment indicators have developed significantly upwards - accordingly, the consumer climate indicator, which is based on several sentiment indicators, is also pointing slightly upwards again.

While consumer sentiment improved, entrepreneurs (ifo) and financial analysts (ZEW) - after a few months of gradually increasing optimism - expressed somewhat more skepticism in February. In particular, the development of the euro exchange rate is probably contributing to the fact that the mood among entrepreneurs has deteriorated somewhat. They fear that its boom could reduce the chances of the export economy - currently the main economic engine in Germany. They may also have been concerned with the question of how the resignation of Federal Chancellor Gerhard Schröder from his position as party chairman of the SPD will affect the progress of the reform projects that have been initiated.

Economic expectations: back in the positive range

After the slight setbacks of the past two months, consumer economic expectations picked up again for the first time this month. The indicator rose by almost 5,8 points from a value of minus 8 points in December to a value of 2,0. It has thus again exceeded the long-term average of 0. A higher value was last measured in September 2002. With a plus of 28 points, the economic mood left the corresponding value for the previous year far behind.

Obviously, the economic signals, which are not only communicated by politicians and the economy, but can also be gradually substantiated with economic facts, cause consumers to rethink and develop a glimmer of hope. This is reflected in the February data from GfK.

Income expectations: pointing upwards, slightly above the long-term average

The economic optimism is obviously also spurring on consumers' expectations of the development of their personal income. The strong plus of 14 points more than compensated for the losses of the two previous months. With a value of minus 0,3 points, the indicator again approached the long-term average of 0 and is thus also well above the corresponding value of the previous year of minus 20,9 points. It remains to be seen whether there will be a real trend reversal in income expectations. In the second half of last year, this indicator had developed very erratically – i.e. alternately up and then down again.

The strong gain in points for the income sentiment indicator is surprising. On the one hand, German households were confronted with new financial burdens resulting from the health care reform at the beginning of the year, which only partially compensated for the reduction in health insurance contributions. On the other hand, despite the tax reform in January, income remained the same, because many companies were not yet able to adjust to the new accounting modalities in January for technical reasons. At the time of the survey, many citizens were still unclear as to what additional net income the early tax reform would bring.

Certainly it is not yet a question of a fundamental reversal. However, the prospects for an uptick in consumer sentiment have become more likely. This is indicated by their more positive expectations of the development of income, but also of the development of prices. In addition, there is some evidence that sentiment in January was worse than the actual situation. The retail sector – as shown by the data from GfK's ConsumerScan panel – did not perform any weaker in January than in previous years. Apparently, in the previous month, Germans had built up a high degree of anger because of the never-ending discussions about tax reform and social security, which was then also reflected in the mood indicators. In February her emotions seem to have returned to normal levels. The optimistic change in mood emanating from business and politics may have helped to ease consumer fears of the previous months resulting from the uncertainty.

Propensity to buy: strongest increase since the introduction of the euro

The propensity to buy indicator also recovered strongly in February. The plus of 16 points compensated for the losses of the two previous months. It is the strongest positive change since the introduction of the euro in 2002. With a value of minus 25,7, the indicator has roughly reached the level of November 2003 again.

The prospects of an economic upswing and an improvement in the personal income situation are obviously also stimulating consumers' propensity to buy. However, caution is still required here in particular: the value is still well below the long-term average. The economic and political optimism expressed in the Vormonten must be followed by action in the next few months, especially those that have a positive effect on the labor market. Only when there are signs of improvement here will the willingness to consume also clearly gain strength and momentum.

Consumer climate: again a slight upward trend

Against the background of the current development of the individual indicators, the consumer climate will improve slightly: for the coming month of March, the consumer climate indicator is forecasting a value of 5,2 points after the revised 5,1 points in February.

The consumer climate is still trending sideways at the moment. A fundamental improvement will only occur if the individual indicators of consumer sentiment continue to develop strongly positively. This will be the case above all if the economic optimism, which is currently mainly based on foreign trade, sends positive signals to the labor market and also spreads to domestic demand.

Source: Nuremberg [gfk]