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Tuesday, May 26, 2009

German Consumer Confidence Steady In May

German consumer confidence remained stable for the fourth month in a row May and GfK AG’s forward looking sentiment index for June, based on a survey of about 2,000 people, was unchanged at 2.5.

"The economic outlook, although remaining at a very low level, has also risen for the second time in a row and the propensity to buy also defended its positive level to remain virtually unchanged in May. Conversely, however, income expectations dropped back as a result of escalating fears of job losses, concerns which are rising in the wake of increased short-time work and declining income prospects."
GFK Press Release

Economic expectations were up very slightly - a 2.9 point increase - suggesting that, at least for the time being the downward trend in the economic climate appears to have halted, but with an index value over 40 points below that for the same time last year, the indicator remains at a very low level.

In spite of continuing economic pessimism over the present, consumers seem to be assuming that the worst is behind us. While in terms of the ferocity of the contraction this is almost certainly true, it does not mean things will improve, only that they will get worse more slowly.

After an increase of 3.4 points in April, income expectations were down by 1.3 points in May. The index currently stands at -9.3 points.

On the one hand, the very low inflation readings - German inflation, according to the harmonized European Union index , rose 0.1 percent in April from the previous month, when they dropped 0.2 percent - and forthcoming pension increases averaging 2.5% seem to have had the effect of stabilizing purchasing power and buoying up income expectations.

On the other hand, growing fears of job losses are having an impact on German sentiment. Following a period of continuous decline in job anxieties in recent years, German concerns about unemployment are once more creeping up, rising by 4 percentage points so far in 2009 according to the GfK survey "Challenges of Europe”. With a 57% rating, problems on the labor market are by far the biggest worry for Germans at the moment. However, the true test of the mood here will only come if the job market contracts significantly during the course of the year, which looks entirely posibel.

The propensity to buy was more or less stationary in the month, with the index recording a minimal rise of 0.1 points. Compared with this time least yearthe index has risen by just under 33 points.

Whether the consumer climate index reading remains at the present level in the coming months, or whether there is another shoe to drop depends very much on the extent to which job market prospects contract. If the short-time work measures prove incapable of generating any identifiable economic revival, companies will be compelled to introduce staff redundancies, leading to a significant increase in the level of unemployment. In turn, this would further fuel fears of job losses and severely impact the consumer climate.

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