A survey of German consumer confidence by Gfk indicated improving sentiment in its September reading. Sentiment increased to 3.7 from a revised 3.4 in August; economic expectations jumped to 8.8 from 1.8; and an index of consumers’ propensity to spend rose to 31.1 from 25.1. This comes on the heels of yesterday’s announcement from the Ifo institute that its German business climate index increased to 90.5 from 87.4 in July, the fifth consecutive monthly sequential improvement.
These surveys suggest increased expectations for continuing recovery, which should translate into increased consumer spending in the near term. Retail Sales data continue to show a mixed picture however, with a separate survey from Markit Economics reported today that its German retail sales index, adjusted for seasonal swings, eased to 49.5 from 49.8 in July, the smallest rate of decline in over a year, yet under the 50 mark signaling contraction.
One consumer spending factor that is crystal clear is the impact of the cash-for-clunkers program on household expenditure. The Federal Statistical Office reported that Germans spent some EUR 36 Billion on purchases of motor vehicles in the first half of 2009, which represented a 23% increase compared to the same period a year ago. These purchases helped contribute to a rise of 0.1% in total household expenditure, which would have equated to a -1% decline in total consumption expenditure without the program.
Other German fundamentals continue to signal sequential improvement. On Monday EuroStat reported that German industrial production rose 4.6% in June month-over-month (+3.1% in Eurozone), after it rose 4.2% in May. We hold that Germany’s recent CPI and PPI figures represent a healthy short term deflationary environment. Today the National Statistical Office reported that August CPI is expected to remain unchanged (0.0%) on an annual basis, from -0.5% in July Y/Y. On the month comparison CPI rose 0.2%, due mostly to a rise in fuel prices, while food prices fell between 0.9% - 1.7% on the previous month.
It’s our expectation that this price environment in Germany will hold for the next couple of months and, as such, that the purchasing power associated with a strong Euro/ imported deflation (July import prices were down 12.6% Y/Y or -0.9 M/M) will be a net benefit in the near term for the consumer, so long as the country can maintain a trade surplus. In the intermediate (TREND) to longer term (TAIL) horizon, a weak Euro will be essential for any significant improvement in exports. The latest GDP report showed that German exports decline only -1.7% from the previous quarter, while imports fell -5.6%, yielding a trade surplus that contributed a significant +1.6% of price adjusted GDP growth.
Despite these positive readings we remain cautious as the stimulus benefit associated with the cash-for-clunkers program winds down into year-end and as short-time worker contracts expire. Short term contracts have greatly contributed to stability in the unemployment rate, and both sentiment and spending could falter as unemployment rises. For now these concerns are only shadows on the horizon, as German sentiment appears strong following the +0.3% Q2 GDP number.
We’ll continue to monitor Germany—especially with elections approaching in a month—and the impact of Europe’s larger economies on the periphery. We sold our position in Germany (EWG) for a tactical TRADE last week. Look for us to buy Germany back on a down move.
Matthew Hedrick
Analyst
