The FINANCIAL -- The trade conflict between the EU and the USA is intensifying and leaves a clear mark on the consumer mood in Germany in June. Economic optimism clearly declines, while both income expectations and propensity to buy manage to hold their ground with slight upward growth. GfK forecasts that the level will remain unchanged in July in comparison to the previous month at 10.7 points.
The route taken by the US President in terms of the trade policy towards the EU is causing concern, especially where economic expectations are concerned. These suffered clear losses. In contrast, the income expectations and propensity to buy are managing to hold up, even making slight gains in June. The consumer climate remains stable as a result.
Trade conflict causes economic expectations to slide further
Following the stable development in the previous month, economic expectations saw a notable decline in June. The indicator dropped 14.1 points to 23.3 points. The last time it showed such a low value was over a year ago, in March 2017, when it stood at 18.1 points. This represents a drop of 18 points compared with last year.
The American President's protectionist trade policy, which affects both Germany and other export-oriented countries such as China, casts further gloom over the economic forecast. As a consequence of this weakening, economic experts are currently predicting that the economic dynamics of the global economy will decline. This will naturally also affect Germany as an export nation. Both the German Institute for Economic Research (DIW) and the ifo Institute assume that the German economy will drop down a gear this year. They have therefore revised down their GDP (Gross Domestic Product) forecast for this year by around half a percent. They now forecast a growth this year of 1.9 and 1.8 percent respectively.
Income expectations stay strong in a more unsettled economic environment
Despite the worsening economic prospects, income expectations were able to hold their ground in June and even exceeded once again what was already an excellent level. Following an increase of 3.4 points, the indicator currently stands at 57.6 points. The last time the level rose higher than this was in August 2017, when it reached 61.4 points.
The ongoing excellent employment prospects are apparently outweighing the current negative global economic influences on the indicator. In addition, both workers and pensioners can hope to see respectable income gains this year. Even the recent rise in inflation rates does not seem to have made much of an impression on consumers so far.
Propensity to buy in the wake of stable income expectations
Consumers' propensity to buy has also profited this month from the very stable trend in income expectations. At 56.3 points, the indicator has maintained a very good level. Compared to the previous month it even achieved a slight increase of 0.4 points. The trend currently shows a sideways movement.
The propensity to buy is still benefiting from an employment market that is in good shape. Employment is up and there has been another slight fall in unemployment. Furthermore, there is also little fear of job losses among employees. This leads to planning security, especially where bigger purchases or spending is concerned.
The jump in the inflation rate in May this year to 2.2 percent, which was mainly due to a significant rise in energy prices, has apparently not yet had any effect on propensity to consume.
Consumer climate unchanged
For July 2018, GfK forecasts that the level will remain unchanged at 10.7 points. This means that the consumer climate is stabilizing after two slight declines in a row.
In contrast to the excellent domestic conditions, such as employment and income development, the domestic economy looks likely to suffer from the escalating trade conflict with the USA coupled with the higher inflation rates, which rose to 2.2 percent in May. Even if this may just be a temporary rise, it can be assumed that it could have negative effects on the real development of private consumer spending. Since the global economy is also slightly less dynamic at present, GfK is revising its consumer forecast issued at the beginning of this year from 2 to 1.5 percent.
However, the consumer economy in Germany remains intact, even if it is slightly less dynamic. This will also depend on whether the new government in Italy fans the flames of the Euro crisis once more and whether the conflict about refugee policy in Europe can be settled.