Germany Consumer Confidence Rises: Is the Economy Reviving?

The recent rise in the German consumer confidence, which looks encouraging at face value, will be difficult to be sustained with wage and employment growth already slowing, according to a report.

Fears over the impact of bail-outs on the German public finances are likely to mean that households prefer saving to spending, according to Capital Economics, which is a macroeconomic research consultancy.

The report by the GfK market research institute showed that consumer confidence rose for the sixth consecutive month.The consumer sentiment indicator, based on a survey of 2000 Germans, rose to 6.0 from 5.9 in February.

Capital Economics has pointed out that pick-up in consumer spending growth from Q4’s 0.8 percent to around 1.5 percent is expected. Jennifer McKeown, Senior European Economist in Capital Economics, has stated that not only would such an improvement help Germany avoid a recession as global demand remains weak, but a revival in the German consumer sector might provide a much-needed boost to demand for exports from the beleaguered periphery.

However, the report is not highly optimistic that this improvement will translate into a convincing consumer revival. First of all, the recent pick-up in confidence has mainly reflected the relative strength of the labor market, which will probably not be sustained. Second, it has stressed that even if labor incomes continue to grow at healthy rates, disposable incomes will be held back by modest fiscal tightening. Finally, worries about the impact of the recent and potential future bail-outs on the German public finances are likely to keep households in a characteristically cautious mode.

Capital economics does make the forecast that the German economy will stagnate this year rather than sliding into recession like most of the rest of the eurozone, which is based partly on the assumption that consumer spending will hold up relatively well. But any hopes that the German economy is finally rebalancing towards domestic economy are likely to be dashed in the coming months as spending rises at modest rates at best.