While German companies have become decisively more optimistic about current business conditions and the outlook for future activity, consumers seem to be getting gloomier again. After a stronger than expected rise in the Ifo business climate, which took the indicator back to its long-term average deemed to be consistent with trend growth, a busy German data week ended on a somewhat softer note with retail sales correcting in June and July consumer confidence dipping further. With confidence indicators seemingly diverging again, what are the risks that the German consumer will be left behind (again) when the economy recovers on the back of buoyant export demand?
With broad retail sales (including cars) contracting by 0.6% over the April to June period, our cautious estimate for stagnating consumer spending in the second quarter is underpinned by higher frequency data. That said, retail sales are not known to be the most reliable indicator and are often revised substantially. Secondary consumer-related indicators are also sending a note of caution. Contrary to soaring business sentiment, consumer confidence continued to slip in July as households became more concerned about their personal finances. Likewise, German retailers have revised down significantly their business expectations in anticipation of a potential two-point VAT hike in January. They also report a marked drop in year-over-year sales growth in July, possibly related to the fact that this July had one shopping day less than the last. The negative impact will likely be, at least partly, compensation by aggressive sales discounts. The summer sales now start earlier and last longer after the strict legislation on discount sales was lifted last year.
More encouraging signs, however, came from the latest labour market report. The report showed a larger than expected fall in the number of jobseekers during July (down 42,000), a strong rise in June employment (up 28,000) and marked gains in the number of job openings (13,000). The best bit, however, was that preliminary estimates by the Labour Office suggest that employment subject to social security contributions, which had been trailing overall employment in recent years, has started to rebound in May, the latest available month. This turnaround in better-paid, full-time jobs would be consistent with the upgrading in staffing requirements that companies reported in the recent business surveys. The reported monthly rise of 113,000 is considerably higher than the average rise recorded in May over the last three years of 24,000 and could hint at more favourable income dynamics.
For these dynamics to materialise, we would need to see the rise in export demand translating into higher investment spending and, over time, into additional demand for workers. With inflation expected to ease in the coming months, and with consumers likely to bring considerable purchases of big-ticket items forward to the second half of this year, in order to avoid paying the higher VAT rate that will likely apply from January, we could well see a temporary recovery in consumer spending, especially on consumer durables, going forward. In fact, despite a gloomy consumer confidence report, purchasing intentions jumped in July. The 8.1% rise in bookings between June and October reported by a large German tour operator might provide first anecdotal evidence of the coming consumer revival. For the revival to become a lasting one, however, the boost to business sentiment from the prospect of an early election would need to spread to consumer confidence.
By Elga Bartsch, Morgan Stanley Economistas published on the Global Economic Foru