Higher Inflation Dampens Consumer Climate in Germany

Consumer sentiment in Germany sends mixed signals in March, according to new GfK study. While economic expectation and the propensity to buy picked up again after a decline in the previous month, income expectations fell slightly. Because propensity to save also rose again in March, the consumer climate prognosis in April is 9.8 points, and thus slightly lower than the 10.0 points in March.

A rise in inflation in Germany and the resultant intensified concerns over income buying power have obviously hindered full recovery of consumer sentiment in March this year. While economic expectations and the propensity to buy largely compensated for losses from the previous month of February, income expectations were down for the second time in a row. Since the propensity to save increased once again, consumer climate declined overall in March.

Economic expectation recovers from the significant drop in the previous month and can make up for a large part of the losses incurred. The indicator rose 8.4 points and now stands at 18.1 points. In comparison to last year, the indicator is up by almost 18 points.

Obviously, the decline of the economic indicator for February was only a temporary setback. Uncertainty amongst many consumers with regards to the policies of the new US president has given way to a greater level of economic optimism again. After a very strong economic year in 2016 with an economic growth of 1.9 percent, consumers generally have positive expectations concerning economic development this year.

According to forecasts, the German economy is set to grow by around 1.5 percent this year and employment is also expected to continue its uptrend in 2017. In contrast to the economic expectations, income expectations did not pick up in March and declined for the second time in a row. At 4.7 points, the decline was, however, moderate. The indicator still reports a high level at 43.4 points.

In particular, the recent blatant price increases strongly affected consumers. Experience shows that Germans react sensitively to changes in certain signal prices, e.g. petrol, diesel or heating oil. In particular, they see the purchasing power of their income impaired by rising energy prices.

German consumers cannot be stopped in their spending mood due to the somewhat less optimistic income prospects. Propensity to buy gained 3.9 points, thus largely compensating for losses from the previous month amounting to six points. The indicator is currently at 55.5 points.

Therefore, the recent price increases have had no impact on the rising propensity to buy. For consumers, the stable employment market trend is obviously of greater importance, since it reduces the fear of job losses, thus providing for a higher level of planning security, especially when it comes to larger purchases.

Following a level of 10.0 points in March, GfK forecasts a slight drop in the consumer climate in April to 9.8 points. Despite this decline, consumers remain on a shopping spree. In comparison to the past, consumer sentiment is still high.