Reduction in VAT Supports Rapid Recovery of Consumer Climate in Germany

German consumers are gradually putting the coronavirus shock behind them, according to GfK. While economic expectations have once again gained slightly, income expectations and the propensity to buy have seen a significant increase for the third consecutive time. As a result, GfK has forecast a figure of -0.3 points for August 2020, 9 points higher than its level in July of this year.

A V-shaped trend is currently emerging for the consumer climate in Germany. A sharp decline in consumer sentiment immediately followed by a rapid recovery. The consumer climate has risen significantly for the third consecutive period, gaining almost 23 points since its low this past spring.

"There is no doubt that the reduction in value-added tax has contributed to the extremely positive progress. It is clear that consumers are looking to make major purchases earlier than planned, which will help boost spending this year," said Rolf Bürkl, GfK Consumer Expert. "Whether this will have a lasting impact is, however, debatable. Retailers and manufacturers must be prepared for the fact that the propensity to consume could decline once more when the standard VAT rate comes into effect in January 2021.

This view is not unfounded. Propensity to buy also rose in the run-up to the last VAT increase in 2007, with purchases being made earlier than planned. However, the indicator quickly returned to its previous level once the higher tax rate came into effect. A similar trend is expected in January 2021 when the original value-added tax rate will apply again.

While, based on past experience, the impact on domestic demand is not likely to last, this measure will serve as an important pillar of the economy. Propensity to buy in particular is already benefiting from this, gaining 23.1 points in July to reach 42.5, just four points lower than at the same time last year.

Income expectations rose for the third consecutive period in July. The indicator gained twelve points and now stands at 18.6. However, this is still around 32 points lower when compared to the same period last year. The promise of a child bonus payment and a noticeable decrease in price expectations are propping up the income indicator.

The economic outlook of German consumers also improved in July. However, the indicator gained just 2.1 points, a far more modest increase than those seen for income expectations and propensity to buy. The indicator currently stands at 10.6 points. The last time a higher value was recorded was in December 2018 at 10.8 points.