Consumer climate: intermediate low or downward trend?

Results of the GfK consumer climate study in July 2004

The mood among German consumers is still not good. After the positive development in June, all indicators that record consumer sentiment in Germany went down again in July. This also affected the consumer climate indicator, for which GfK forecast a value of 3,4 points in August.

In the previous month, all indicators of consumer sentiment, ie economic and income expectations as well as consumers' propensity to make larger purchases, had risen significantly. However, the hope that this might be the first sign of a change in mood was not confirmed in July: the growth in economic and income expectations of the previous month was more than reversed in July. The propensity to buy also went down again. Accordingly, the consumer climate for August is forecasting a significantly lower value of 3,9 points after the revised 3,4 points in July.

This shows that consumers are currently clearly less optimistic than entrepreneurs (ifo), financial analysts (ZEW) and economic research institutes, who - in particular because of the good export business - had gradually raised their growth forecast for this year.

Economic expectations: the trend is negative

Consumers are not yet impressed by the gradual increase in the growth forecasts of the economic research institutes for Germany's economy towards two percent. After they had been much more optimistic in June than in the previous month, things went down again in July with a minus of 8,5 points to a value of minus 20,5 points. A lower value was last measured in May 2003. Since the turn of the year 2003/2004, when the indicator even briefly exceeded the long-term average value of zero, it has tended downwards – because the upturn in one month was followed by a comparatively larger downturn in the next month.

Consumers are losing faith that there will be a real economic turnaround in the foreseeable future, which could also bring the revival of the labor market that they in particular are hoping for. The persistently high number of unemployed and the currently sparked discussions in many places about the relocation of jobs, the increase in working hours and recently the measures introduced with Hartz IV to combine unemployment and social assistance feed their doubts that the private sector and politics are in a position to initiate the economic upswing - not only in favor of the entrepreneurs, but also in favor of "the little man off the street".

Income trend: Zigzag course with a downward slope

The constant ups and downs in German consumers' expectations of their personal income continued in July. After the indicator had risen significantly in June, it fell again in July: with a minus of 7,5 points after a plus of 3,5 in the previous month. The income expectations indicator is currently at minus 14 points. Since the middle of last year, it has regularly increased in one month and then decreased again in the next. As with the indicator of economic expectations, the losses in income expectations were also slightly larger than the increases of the previous month, so that the indicator tended to develop slightly downwards.

The apparent increase in income pessimism is primarily fueled by the great uncertainty about the future financial constraints for private households. The continuation of the discussion about the health care reform, the per capita payment and citizens' insurance or a combination of both contributes significantly to this. In addition, the fear of unemployment is growing, which - against the background of the Hartz IV discussion - is perceived as threatening, especially by older workers. The discussions that have broken out around DaimlerChrysler and other companies about cost savings, longer working hours and relocation of jobs do the rest to the fact that citizens feel that they are the "true" victims of failed politics and mismanagement by private companies.

Propensity to buy: ongoing reluctance

The Germans' propensity to buy lost the most value in July: the indicator fell from almost 13 points to minus 37,4 points. This puts an end to the slightly positive trend that was noticeable despite the ups and downs of the previous months. The recent negative development is directly based on the gradually becoming more pessimistic expectations of the development of both the economy and personal income. Both are causing consumers to exercise caution, especially when purchasing longer-lasting consumer goods such as consumer electronics products.

Apparently more and more German citizens are convinced that they are the losers in the reform discussions. That is why they continue to hold back on their consumer spending. The fact that consumers are expecting rising prices has a reinforcing effect – another factor that is dampening their willingness to spend.

Consumer climate: quo vadis?

In view of the renewed deterioration in consumer sentiment and the fact that all of the mood indicators that are used in the consumer climate are also trending downwards, it is foreseeable that the consumer climate will weaken overall. The consumer climate indicator forecasts a value of 3,4 points for the month of August – after a revised value of 3,9 points in July.

There are many indications that the fears that have been floating around for months that private consumption will not provide any effective impetus for economic development this year have come true. Exports seem to have an invigorating role. On the other hand, domestic demand is likely to be in poor shape for the rest of this year. A fundamental turnaround can only be expected when consumers realize that the situation on the labor market is fundamentally easing and an end to the financial and sometimes even existential uncertainty is recognizable.

To study

The findings come from the "GfK Wirtschaftsdienst consumption and savings climate", which is published by the GfK market research. They are based on monthly consumer interviews, which are conducted on behalf of the EU Commission. In the first half of each month around 2.000 representatively selected people are regular intervals questions include, how they assess the overall economic situation, their propensity to buy and their income expectations.

Source: Nuremberg [gfk]