Is German consumer optimism returning as Christmas approaches?

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The German GfK Consumer Confidence Index for December inched up to -27.8, ahead of November’s -28.3 and analyst expectations of -27.9. The index takes willingness to buy, income expectations and business cycle expectations into account.

The marginal increase was largely put down to the Christmas and holiday season increasing consumers’ willingness to buy, following months of saving.

However, the overall mood was still very much tinged with concern and uncertainty, as Germany’s economy still struggles with the effects of slow economic growth and weaker-than-expected demand.

Germany’s gross domestic product (GDP) contracted 0.1% in Q3 2023, driven lower by shrinking private spending and inventory changes, as high interest rates and soaring inflation made themselves felt.

The manufacturing sector also continued to struggle, although November’s manufacturing purchasing managers’ index (PMI) numbers were slightly more encouraging, rising to 42.3, from 40.8 in October.

However, global Purchasing Managers’ Index data for the country, which measures whether market conditions are shrinking, stable or growing, came in at 47.1 in November 2023. This was a step up from October’s 45.9, while also being the highest since July.

It’s not all good news though, as PMI figures under 50 indicate contraction in an economy. For Germany, November was the fifth month in a row of contraction, which could point towards a looming recession.

Income expectations for December in the German consumer confidence index came in lower at -16.7, down from 15.3 in November. Business cycle and economic expectations stayed mostly flat, at -2.3, up from -2.4 in November.

However, there were very few, if any signs of a sustainable recovery, with most indicators pointing simply towards a seasonal change in mood. Therefore, it is quite likely that sentiment will tank once more, come January.

What’s causing the German economy to slump?

The housebuilding and real estate sector is one of the biggest reasons why the German economy is struggling at the moment, with new orders being considerably low. Existing orders are also being cancelled at a faster rate, which could lead to a serious slump in the sector once order backlogs have cleared.

Furthermore, the recent budget crisis and government spending freeze have further contributed to what is already a chaotic situation. Now, investments in green initiatives have also been put on hold.

Higher inflation has been another significant driver of the economic contraction. However, with inflation slowly coming into control now, there are more hopes that the European Central Bank may wind up its monetary tightening policy in the next year.

If so, this should also considerably reduce interest rate pressure on German consumers, hopefully translating into higher consumer spending, as disposable income rises.