Shock Decline in German Consumer Confidence - What's Next for the Economy?

Consumer sentiment in Germany unexpectedly worsened in July, interrupting the recovery of the previous four months. Expectations for economic development, personal incomes, and the desire to buy weakened as the propensity to save increased.

The latest survey by the German GfK Institute, conducted among about 2,000 consumers between May 30 and June 10, 2024, revealed this downturn. GfK's consumer sentiment index for July fell to -21.8 points from -21.0 points in May, missing market expectations for an improvement to -18.9 points. This marks the first deterioration in consumer confidence in Germany in five months.

Rolf Bürkl, an expert at the GfK institute, noted, "The break in the recent uptrend in consumer sentiment shows that the path out of sluggish consumption will be difficult and there could always be some pullback."

He attributed the increased uncertainty among consumers to a slightly higher rate of inflation in Germany in May, which also led to a rise in the desire to save. Bürkl emphasized that for a sustainable recovery in consumer sentiment, consumers need planning certainty and a clear future outlook, which the government must communicate effectively during upcoming budget discussions.

The GfK Institute uses three sub-indices—for economic expectations, income expectations, and propensity to shop—to determine sentiment for the following month. In June, the index measuring consumer income expectations fell for the second time after four consecutive months of growth, dropping by 4.3 points to +8.2 points. Despite this decline, it remains nearly 19 points above its June 2023 level.

The moderate decline in income expectations is likely due to rising inflation, which accelerated slightly in May to 2.4% year-on-year....