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Tuesday, June 23, 2009

Consumer Sentiment Also Stable In June

GfK AG’s forward looking German consumer sentiment index for July increased to 2.9 from a revised 2.6 in June. But sentiment is still on a very low level, and in general the story is the same as the IFO one yesterday, it's all about expectations. But are these expectations well founded?

With all the talk in the press and by politicians that the economic downturn may be coming to an end, consumer hopes of economic stabilization are intensifying and accordingly, economic expectations are increasing moderately. The fact that the employment market has remained fairly robust is likely to be one reason for this. Reports that the inflation rate stood at 0% in May are having a positive effect on income expectations and the propensity to buy.

Economic expectations increased for the third month in a row. The increase of 5.7 points is even more pronounced than in the two preceding months. The indicator currently stands at -22.6 points.

Economic pessimism is declining somewhat and consumers seem to be expecting that the steep economic decline can gradually be halted. Certainly, this increase in the indicator has been supported by the fact that the expected slump on the unemployment market has so far not materialized, and has been deferred by improved short-time working regulations. However, the indicator is still far too low to warrant talk of an incipient recovery from the perspective of consumers.

Following the slight drop last month, income expectations have once again recorded increases in June. The indicator has climbed 6 points to stand at -3.3, which is the highest value since April last year. The decrease in inflation and the prospects for pensioners of a significant boost to their received pension payments as of July 1, 2009 are certainly the important factors buoying up income expectations at present. These factors are counteracting creeping redundancy fears and have held at bay the negative effects on the indicator up to now. However, it is to be expected that the forecasted deterioration on the jobs market will increase these unemployment fears, and will place a great amount of strain on income expectations.

The propensity to buy not only retained its current level in June, but even improved slightly. Following an increase of 2 points this month, the indicator now stands at 14.5 points, which means that there has even been a considerable improvement of 38 points in comparison with the prior year. According to GfK the large decrease in inflation is currently stimulating the propensity to consume. Falling prices, for example as a result of the scrappage bonus, act as incentives to buy. Other industries are also implementing this type of price reduction, in order to encourage consumers to make further purchases.

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