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Shock Decline in German Consumer Confidence: What’s Next for the Economy?

In an unexpected shift, consumer sentiment in Germany deteriorated in July, interrupting the recovery trajectory observed over the past four months.

The German GfK Institute’s latest survey, conducted among approximately 2,000 consumers between May 30 and June 10, 2024, highlighted a decline in optimism regarding economic development, personal incomes, and the propensity to buy, coupled with an increased inclination to save.

The GfK’s consumer sentiment index for July fell to -21.8 points from -21.0 points in May, missing market expectations for an improvement to -18.9 points.

This marks the first decline in consumer confidence in Germany in five months, suggesting that the path to steady economic recovery remains fraught with challenges.

Rolf Bürkl, an expert at the GfK Institute, noted the significance of this downturn. “The break in the recent uptrend in consumer sentiment shows that the path out of sluggish consumption will be difficult, and there could always be some pullback,” he stated.

Bürkl attributed the increased uncertainty among consumers to a slightly higher rate of inflation in May, which also led to a rise in the propensity to save.

He emphasized that for a sustainable recovery in consumer sentiment, it is crucial for consumers to have planning certainty and a clear outlook on the future, which the government must effectively communicate during upcoming budget discussions.

The GfK Institute determines the consumer sentiment index based on three sub-indices: economic expectations, income expectations, and the propensity to shop.

In June, the index measuring consumer income expectations fell for the second time after four consecutive months of growth, dropping by 4.3 points to +8.2 points. Despite this decline, it remains nearly 19 points above its level in June 2023.

The moderate decline in income expectations is likely due to rising inflation, which slightly accelerated in May to 2.4% year-on-year, moving away from the European Central Bank’s target level of 2 percent.

An in-depth analysis revealed that 62% of respondents cited rising prices as the main reason for their pessimism about incomes.

The propensity to buy also weakened in June, with the corresponding index decreasing by 0.7 points to -13.0 points. This index has remained at extremely low levels for more than two years, as rising prices have led households to spend more on essential items like food and energy, thereby reducing their financial resources for larger purchases.

The lack of planning certainty has also led people to build up reserves for emergencies, further diminishing robust consumption.

Hopes for a quick economic recovery this year have also waned. The index of consumer expectations for the economy fell by 7.3 points to 2.5 points in June, ending four consecutive months of improvement.

Despite the June decline, there is still a cautious optimism that the economic recovery in Germany will continue in the second half of the year, albeit at a slow pace.

Some economic experts do not anticipate any significant acceleration in the economic recovery until next year, according to GfK.

As Germany navigates through these uncertain times, the government’s role in providing clear communication and effective planning will be pivotal in restoring consumer confidence and ensuring a steady path toward economic stability.

 

This article was created using automation technology and was thoroughly edited and fact-checked by one of our editorial staff members

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