Consumer confidence in Europe's largest economy, Germany,dropped for the first time in six months at the end of August, according to Gfk's confidence index for September, which is based on a survey of about 2,000 people. The consumer climate index projected for September fell to 7.6 from 8.5 in August.
The economic outlook sub-index also fell to 48.4 from 64.8, while the income expectations sub-index dropped to 9.2 from 27.9. There was also a decline registered in households' willingness to spend, with that sub-index dropping to 6.4 from 9. To get some idea of where we are, here is the complete index for the last 12 months. As we can readily see, during the last three months nothing has been trending upwards, and the economic outlook and income expectations components have been moving notably down.
Now if we look at the individual components we can get a clearer picture. Firstly the consumer climate:
Really this is not so bad as might have been expected, the climate was much worse back in January and February, just after the 3% increase in VAT. Confidence subsequently picked up, but it may well now have turned again.
If we look at the economic outlook sub index, this seems to have peaked back in May-June, and be now trending down in a way which conforms to the picture we have been getting from the GDP data.
The consumer propensity to spend sub index also makes interesting reading. We can see a marked propensity to spend in the last months of 2006, and then a sudden drop at the start of 2007. The VAT rise is evident. What is also evident is that the effect of the VAT rise has not worn off, as many suggested it would. The 3% increase in costs is still there, and remains there, and the impact will continue. Conclusion, increasing consumption taxes is NOT a way to pay for the health and pension costs associated with an ageing society. It is simply counterproductive, as we are now about to see, I fear.
Finally lets take a look at the income expectations sub-index. This is perhaps the most interesting one of all. Now many of you may remember that early this year there was a lot of talk in the press, and over at the ECB, about how German wages and salaries would start to rise as unemployment dropped and the recovery gathered pace. This was one of the reasons behind the "strong vigilance" expression in the ECB statements. Well if you look at the expectations index you will see that from March to June many people in Germany seemed to believe this story, despite the fact that wages have actually been pretty flat. But as we can see, reality is sinking in, and the German wage earner no longer believes the Goldilocks recovery story, which is one of the main reasons I don't either see this trend as a knock-on effect of sub-prime scandals or as simply a short term blip, but rather I think it forms part of the normal course of events we have become so used to in the German economy context.
As I say in this post, perhaps it is about time that people started to adjust their 2007 German GDP forecasts, to take into account the evident underlying reality there.