The FINANCIAL -- Consumer confidence is ending the year on a largely positive note. Economic expectations have increased slightly, while income expectations have seen significant growth.
In contrast, propensity to buy has suffered moderate losses. The overall consumer climate index is forecasting 9.9 points for the first month of next year, after a figure of 9.8 points in December.
Consumers are remaining optimistic as 2016 draws to a close. As suggested by the third successive increase in economic expectations, they believe that the German economy is on course for moderate growth. Although income expectations have risen noticeably in December, propensity to buy has so far not been able to capitalize on this. However, despite having recorded modest losses, it remains at a very high level, according to GfK.
Economic outlook climbs for third time in a row
As the year comes to an end, consumers believe that the economy will continue to grow moderately in the coming months. Economic expectations have risen for the third successive time. However, at 1.1 points, the increase is only slight. The economic indicator currently stands at 16.4 points, which is 13.5 points above the figure recorded for the same period in the previous year.
So far, the outcome of the US presidential elections, which took many by surprise, does not seem to have had an effect on consumer sentiment. Consumers evidently do not expect the result to have any direct impact on the German economy over the next few months.
The increasing economic optimism felt by consumers is not unwarranted. The majority of experts have also anticipated that, after a slightly weaker third quarter of 2016, economic momentum would recover during the final quarter of the year. As mentioned in its latest forecast issued in December, the German Federal Bank (Deutsche Bundesbank) expects domestic demand to be the main driver of this. Overall, the German Federal Bank predicts economic growth of 1.8 percent for both this and next year (source: German Federal Bank, Bundesbank projection: German economy continues on upward path, press release dated December 9, 2016, www.bundesbank.de). The labor market is also expected to benefit from this growth, as according to this projection employment is anticipated to rise.
Income expectations soar
After falling for three months in a row, income expectations have stabilized in December, rising by an impressive 11.1 points to 55.6 points. This is around 5 points higher than the previous year's value. The slight downward trend recorded over the last three months has therefore come to an end.
The continued growth in employment, which – as already mentioned – also contributes to the economic outlook, is also reviving the year-end income expectations. The excellent condition of the labor market is awakening hope that there will be sustained strong growth in wages and salaries.
This optimism is currently not being dampened by consumer prices, which are once again on the rise. Oil-producing countries have announced their intentions to reduce crude oil production at the start of 2017. This will result in energy prices climbing in Germany once again as well as in higher inflation that will put a squeeze on households' real purchasing power. Nevertheless, consumers continue to believe that wage and salary increases will be significantly greater than the inflation rate and that they will therefore continue to have more in their wallets in real terms.
Propensity to buy suffers slight losses
The year-end propensity to buy has not benefited from the improved economic and income expectations. The indicator has lost 3.2 points, falling to 48.0 points. This means that it is currently just one point lower than the corresponding value recorded for the previous year.
However, despite this slight decline, propensity to consume remains extremely high and the appetite to make purchases is still strong. Retailers can probably safely assume that consumers will continue to flock to the shops in their droves and spend money in the days following Christmas. Given the stable labor market conditions and low interest rates, this high propensity to buy is hardly surprising.
Consumer climate index to get off to a flying start in the new year
For January 2017, the overall indicator forecasts 9.9 points, after a figure of 9.8 points in December 2016. This means that the consumer climate index is expected to enjoy a strong start to 2017.
Consumers seem to be totally immune to a series of risk factors, such as the outcome of the US elections, Brexit, the flare-up in the financial crisis in Italy following the failed referendum and the resignation of Prime Minister Renzi, and the persistently high terror threat. It appears as if consumers generally regard labor market conditions as playing the crucial role in their decision as to whether to make purchases. In addition to being stimulated by the low level of concern about unemployment, propensity to consume is also being positively influenced by historically low interest rates.
GfK confirms the forecast that real private consumer spending would increase by around 2 percent this year. This means that private consumption remains an important pillar of economic growth in Germany.