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Tuesday, October 28, 2008

German Consumer Confidence Rebounds Very, Very Slightly In October

German consumer confidence increased - ever so slightly - for a second month entering November as a decline in oil prices, and continued stability in the job market, left Germans just that little bit more confident about the level of their real incomes.

GfK AG's forward looking index for November, based on a survey of about 2,000 people, rose to 1.9 from 1.8 in October. Inflation slowed in September and the price of oil has more than halved since a July peak of $147.11 a barrel, boosting households' disposable income. On the other hand, a deepening crisis on global financial markets has sparked fears of a recession, curbing consumers' willingness to spend. At some point the rapid slowdown hitting the German economy will reach the labour market, and it is to be expected that confidence will then take another knock, in the meantime we should bear in mind that we are still only fractionally above Septembers very low level.

``Many Germans are playing a waiting game as far as their purchases are concerned,'' GfK said in the statement. While oil- price declines have ``supported income expectations,'' the ``panic on the international stock exchanges has shaken consumer confidence in the future economic outlook.''

Economic outlook: growing fears of recession

According to the GFK report, the economic expectations for October fell again considerably by 11.8 points to its current level is -27.5 points, which is a good 66 points down on the value of the same period in the prior year. The indicator is now at its lowest level since May 2003.

This is basically due to the fact that fears of a recession have been rising amongst Germans over the last month. The main contributing factor to this will have been the continuing turmoil on the international stock exchanges, which has shaken consumer confidence in the future economic outlook. Germans seem therefore to be in agreement with most financial and experts, who believe the German economy is "on the brink of a recession”, which is also the title of the autumn 2008 report which was recently published by the country's leading research institutes.

Income expectations: purchasing power not in any greater danger

The significant drop in oil prices has obviously supported income expectations in October. The income expectations indicator rose by more than one point to its current value of -12.9 points. Nevertheless, the level remains low, a fact that is further born out by the -12.2 point drop compared with the same period in 2007.

Up to now, consumers have remained pretty calm in the face of the extreme turbulence on the international financial markets, at least insofar as income expectations - a major determinant of the consumer climate - are concerned. A GfK survey on the effects of the financial crisis on investment behavior and consumer confidence in the banking sector carried out in mid-October also produced a similar result. On the one hand, relatively few Germans have invested in stocks and shares, whose value is well down due to the financial crisis. On the other, general conditions, such as the job market and the diminishing pressure of inflation, continue to remain positive.

Propensity to buy: fears of a recession leading to consumer reticence

However, following strong growth in September (a 15 point rise) reticence to purchase is currently on the increase again. The propensity to buy indicator fell back 5.4 points on the month to its current level of -18.2 points. This is still a good five points down on the value registered in October 2007..

Fears of the German economy lapsing into recession means consumers remain reluctant to make larger purchases. This has become particularly noticeable in the automotive and construction industries, and both sectors are already reacting to the decline in demand by curtailing their output. The easing of inflationary pressure has obviously not generated any noticeable stimulus in demand, and many Germans seem to be playing a game of "wait and see" as far as their purchases are concerned.

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