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.

German Business Confidence Still Improving In May

German business confidence edged up slightly for a second consecutive month in May as interest-rate cuts at the ECB and government stimulus packages raised expectations that the worst recession since World War II may be easing ease. The Ifo institute business climate index, which is based on a survey of 7,000 executives, nosed up to 84.2 from 83.7 in April, having hit a 26-year low of 82.2 in March. As you can see from the chart below, things have improved, but not that much.

The manufacturing outlook remained broadly unchanged, with survey respondents reporting a deterioration in current business as compared with April but improved expectations over the next six months.


In wholesaling and retailing business climate has generally improved. Retailers are no longer so dissatisfied with their current business situation and anticipate a less unfavourable six-month business outlook. In construction the climate was found to have worsened again. Building contractors are less satisfied with their current business situation and havea less favourable business outlook than in April.

Chancellor Angela Merkel’s coalition has intorduced stimulus plans worth about 82 billion euros to try to offset the worst of the recession, and the government still expects the economy to contract by around 6 percent in 2009.

The European Central Bank this month reduced its benchmark rate to 1 percent, a record low, and ECB President Jean-Claude Trichet does not exclude the possibility of further cuts.

The top Germany economic institutes forecast the country will lose 1.4 million jobs this year and next, pushing the average number of unemployed to a five-year high of 4.7 million. German unemployment rose for a sixth straight month in April, taking the jobless rate to 8.3 percent.

On the other hand German manufacturing activity contracted at the slowest pace in seven months in May,according to the flash purchasing managers index, while investor confidence rose significantly this month, climbing to a three-year high.





Bundesbank President Axel Weber said recently “There are some grounds for being optimistic......However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track.”

Europe’s Economic Activity Looks Up (a bit) In May

Well the eurozone outlook is certainly deteriorating less rapidly at this point than it was, at least this is the impression given by the May flash Purchasing Managers Indexes (PMIs) - which show the pace of economic contraction slowing markedly from April. PMI readings for the 16-country euro area rose significantly this month, and hit their highest level for the last eight. It is, however, important to bear in mind that the index still registered contracting economic activity, even if the rate of decline fell for a third consecutive month. Chris Williamson, chief economist at Markit, who compile the indexes, said the latest readings were consistent with second quarter GDP falling about 0.5 per cent quarter on quarter (or by a 2% annual rate), well down from the 2.5% quarter on quarter GDP outcome (or 10% annual rate) in the first three months of the year. That being said, we are still in the realm of contraction, and organisations such as the International Monetary Fund, the European Commission and European Central Bank continue forecast a return to positive growth only in 2010.

In fact, May’s eurozone “composite” index, covering manufacturing and services, stood at 43.9 in May, up from 41.1 in April, the highest since September.



The eurozone economies, especially the export-led German one, showed themselves to be particularly vulnerable to the collapse in global demand after the failure of the Lehman Brothers investment bank. Most hopes for short term recovery are based on the idea that since companies have now substantially reduced inventories they will need to step up production to meet future orders. And this, it is true, will give a short-term uplift to output (which is what we are seeing). But for this short term uplift to translate into a full-blown expansion, the demand for inventory renewal has to provoke an increase in investment to fuel an anticipated future increase in demand, and it is far from clear that we are seeing this at this stage.

We do not have detailed data for Q1 GDP for the eurozone economies yet, so evidence for investment behaviour is scanty, but if we look at the evidence from Japan, investment activity slumped massively in between January and March, and there is no reason why the situation should be very different in Europe. Japanese business investment was down a record 10.4 percent year on year in the first three months, and a massive 35.5% over the last quarter.

On the other hand, eurozone economic activity will continue to come under pressure in the months to come as the impact of the sharp contraction in activity feeds through into the labour market. And companies are likely to keep cutting spending because the decline in external demand has left factories operating well below capacity level, and semi-idle workforces can only be retained for so long. Markit said that the pace of job losses had eased this month – but only slightly compared with the record pace reported in April.


The flash reading only gives details for two of the euro area's big four. The rate of decline in Germany's private sector eased to its slowest in seven months in May, and the composite index rose to 44.4 from 40.1 in April, suggesting the contraction in the second quarter will be much slower than the 3.8% slump (15.2% annualised) in the first. Markit estimated that we may be looking at something like a 0.6 decline (-2.4% annualised). The outcome may be a bit worse than this, but still a significant improvement seem certain.

The German manufacturing PMI index rose to 39.1 from 35.4 in April, while the services sector index rose to 46.0 from 43.8. The manufacturing index was dragged down by major job losses in the sector, and according to Markit "Manufacturing employment in Germany is falling at a far, far faster rate still than services...Manufacturing has really been hammered even though there was some easing in the rate of job losses in May."




The French services PMI was up at 47.6 in May from 46.5 in April, while the manufacturing sector also rose to an above expected level of 43.1 from 40.1.

So it would be very premature to draw the conclusion that we are out of the woods yet. The euro hit 1:40 to the dollar on Friday, and with this level it is hard to see how German exports are going to stage a recovery with currencies like the Swedish Krona and the UK pound down something like 20% over the last year. And remember, with Italy and Spain themselves in deep recessions German companies are now going to have to look well beyond the eurozone to find those much needed customers.