Consumer climate: mood dampens in the West while optimism remains in eastern Germany

Findings of the GfK consumer climate survey for November 2005
Nuremberg, 28 November 2005 ?After the significant upturn in October, the consumer mood dampened again in November. This downturn is due exclusively to consumers in western Germany, who have again become especially skeptical about the economic outlook as well as about their own financial prospects. Only the propensity to make larger purchases in the immediate future has seen a further slight improvement. Overall, this means the consumer climate indicator is forecasting 3.1 points for December after the revised figure of 3.3 points in November. GfK therefore stands by its forecast that private consumption in Germany in 2005 will not overreach the 0.2 per cent mark.
After the overall positive trend in the previous month, consumers were unsettled by the wrangling about policies and personalities during the coalition negotiations between the CDU/CSU and SPD in the first half of November, which caused the mood to turn again slightly. This is likely to be largely due to the prospect of a significant rise in value added tax. (The final coalition agreements were not reached until after the November survey had been completed.)
Looking at eastern and western Germany separately, the consumer mood indicates that consumers in western Germany are considerably more pessimistic than they were in October in relation to the economic outlook and their individual finances. By contrast, consumers in eastern Germany are more optimistic than before, not only with regard to the overall economy and their own financial prospects, but also in terms of buying propensity. These are the consumers who showed an upturn compared to October in the propensity to make larger purchases in the coming weeks and months. It would appear that the prospect of a government formed from a large coalition has had a completely different impact on consumers in the West than it did in the East. However, the level of consumer expectations in eastern Germany remains clearly more pessimistic than in western Germany.
For the second time since August this year, GfK has broken down the findings of the consumer climate survey into different social groups for November. The differentiated analysis shows that the mood among Germans varies greatly according to their stage of life and financial situation. GfK will publish this differentiated analysis every three months (the social groups are defined in detail on page 5).
Economic outlook: considerable downturn after three month upward trend
After three consecutive months of rising consumer optimism with regard to the economic outlook, expectations deteriorated considerably in November. At minus 10 points, the indicator has slipped back into negative figures and currently stands at minus 8.6.
With a rise in VAT becoming more of a certainty as the coalition negotiations progressed, the faith that consumers in western Germany had in a quick recovery for the economy was shaken.
The consumer perception of current economic development is more negative than that of the financial analysts (ZEW), but similar to the views held by companies (ifo), whose assessment of the business situation is also more skeptical than in October.
Economic
outlook
Income
exp.
Propensity
to buy
Nov 05
Figure1)
Change on previous month1)
Figure1)
Change on previous month1)
Figure1)
Change on previous month1)
Students and trainees
+5.6
-27.9
+37.9
-14.4
-8.1
-8.7
High income2)
+5.5
-5.0
+27.9
-19.8
+15.8
+9.9
Medium income2)
-16.0
-10.8
-14.1
-5.5
+0.4
+3.4
Low income2)
-17.0
-11.4
-25.1
-16.3
-14.2
+1.7
Older retired people
-13.2
-2.5
-45.7
-5.4
-23.1
+2.9
Western Germany
-5.2
-13.4
-10.0
-11.1
-6.6
+/-0.0
Eastern Germany
-20.8
+2.7
-22.1
+4.5
-14.1
+9.3
Total
-8.6
-10.0
-12.9
-7.8
-8.1
+2.1
1) Indicator points. 0 is the long-term average. 2) Working life
The breakdown in the economic outlook indicator per social group shows that all social groups were more negative in November than in October. The mood deteriorated, especially among students and trainees as well as housewives and househusbands and people on medium and low incomes. For the latter groups and retired people, the indicator values are also considerably lower than the long-term average of zero. These are the groups that view the economic situation in Germany particularly critically. They are also the groups whose livelihood depends most on trends in the labor market, and in the case of retired people, the stability and smooth-running of the social security systems.
Income expectations: uncertainty remains, mood lowest in lower income groups and in western Germany
Given the downturn in estimates for economic development, it is hardly surprising that the income expectations indicator also lost ground. The indicator dropped by 8 points and now stands at minus 12.9. This decline stems exclusively from the fact that consumers in western Germany were significantly more pessimistic than in the previous month. It was striking that consumers in eastern Germany on the other hand were more optimistic than in October.
The worsening mood in western Germany is most likely the result of the fact that the new coalition will most likely increase VAT, although this resolution had not been adopted by the time of the survey. The abolition of commuter allowances and reduction in tax-exempt savings allowances also probably helped to depress consumers?income expectations. Sustained high energy prices are also helping prevent any upturn, especially with the winter months ahead, as rapid price hikes will further impair the fragile purchasing power of many households.
As with the economic outlook, the differentiated analysis indicates that all social groups perceive their personal financial prospects as worse than in the previous month. The enormous gap between the students and trainees and the high income group on the one hand, and the other three less well-off groups remains. While the indicator for the first two groups is positive and significantly above the long-term average of zero at 27 points and higher, the value varies in the other groups from minus 14.1 for the middle income group and minus 45.7 points for retired people.
Propensity to buy: no change in western Germany, on the increase in eastern Germany
Unlike the economic outlook and income expectations indicators, the propensity to buy saw a slight upturn in November. The indicator rose by 2.1 points to minus 8.1. Compared to the corresponding figure for the previous year, this is a rise of a good 16 points. The trend therefore remains upward. This slight upturn in the indicator is due solely to consumers in eastern Germany, who are reporting a considerably greater propensity to buy. By contrast, the indicator for western Germany did not move.
At the time of the survey, many consumers were assuming that the increase in VAT would come into force much earlier than 1 January 2007. It is therefore only logical that they decided it was a good idea to make larger purchases now and to bring the corresponding purchases forward. This is particularly the case where consumers had postponed making necessary purchases because of uncertainties relating to income and jobs. The prospect of everything becoming 揺ven more?expensive, on the one hand, and the approach of the end of the year on the other, are possible factors motivating people to bring these purchases forward.
The fact that this is not necessarily grounds for excessive confidence is highlighted by the differentiated analysis. While the propensity to buy clearly fell in the students and trainees group as well as the higher income group, it rose slightly among the other groups which are not as well off.
With the approach of Christmas and the New Year, the findings for November do not bode well. It would seem that consumer reticence when it comes to making purchases will remained unchanged, especially in western Germany, and even the positive survey responses from people in the middle and low income groups and retired people are no indication that Christmas business will really be booming.
Consumer climate: no stabilization at a higher level
Against the backdrop of the current trend in mood, the consumer climate indicator fell slightly. For December the indicator is forecasting 3.1 points after a revised 3.3 for November.
We presume that fact that the indicator showing the propensity to make larger purchases has risen among the lower income groups, especially in eastern Germany, is mainly connected with to the fact that they intended to make these necessary purchases now anyway. A fundamental reversal in the private consumption trend is no more likely than before.
The likelihood of private consumption increasing depends very much on the extent to which energy prices, consumer taxes and the abolition of tax benefits restrict people抯 disposable income. It remains to be seen whether the end of coalition negotiations and the new government taking power will generate the required optimism. Domestic demand in 2005 is accordingly not expected to generate any economic impetus. GfK therefore stands by its prediction that, as a result, private consumption will only rise by 0.2 per cent. This trend in consumer behavior will not fundamentally reverse until there is sustained improvement in the overall economic situation and pressure in the labor market has noticeably eased.
The consumer climate survey
These findings are extracts from the comprehensive 揋fK consumer climate MAXX?survey, which is based on around 2,000 consumer interviews conducted each month on behalf of the EU Commission. The report contains charts, forecasts and a detailed commentary regarding the indicators. In addition, the report includes information on proposed consumer spending in 20 different areas of the consumer goods and services markets.
The next publication date will be 28 December 2005.
The following table provides an overview of the individual social groups:
Students and trainees
Young people: development of social behavior. Adapting and protesting, Youth culture.
Students: the high earners of the future. Big plans, small budgets.
High income1)
Young people with a high income: the best chance for self development. Active and ambitious.
Middle-aged people with a high income: the top-earning managers. Performance and privileges.
Housewives and househusbands with a high income: women/men in the high income group. Self-realization.
Medium income1)
Young people with a medium income: the young middle income group. On the way to success.
Middle-aged people with a medium income: the established middle income group. Security and developing achievements.
Housewives and househusbands with a medium income: women/men in the middle income group. Individuality and duty.
Low income1)
Men with a low income: men in the low income group. Work and leisure time is defined. Traditional role as a man.
Women with a low income: women in the low income group. Work and leisure time is clearly defined. Traditional role as a woman.
Older retired people
Older men2): social group comprising retired individuals. New leisure time and activities.
Older women2): social group comprising older women. New self confidence and focus on emotion.
Single older people (own household): self-determined lifestyle in old age.
1) Working life 2) Including middle and low income
The social groups concept was jointly developed by Professor Dr. Gerhard Kleining from Hamburg University and consumer research experts at GfK Panel Services Germany. The concept was subject to extensive tests before being adopted.
The table below provides an overview of the individual indicators:
Income expectations
This indicator is based on the following question to consumers: 慔ow do you think the financial situation of your household will develop in the next 12 months??(improve ?stagnate ?deteriorate)
Economic outlook
This indicator is based on the following question to consumers: 慔ow do you think the general economic situation will develop in the next 12 months??(improve ?stagnate ?deteriorate)
Consumption and buying propensity
This indicator is based on the following question to consumers: 慏o you think it is advisable to make major purchases at the moment??(good time ?neither good nor bad time ?bad time)
Consumer climate
This indicator is used to describe private consumption. Key factors are income expectations, buying propensity and savings. The economic outlook has a more indirect effect on the consumer climate, generally as a result of income expectations.
For further information, contact: Rolf B黵kl, GfK Marktforschung,
Tel. + 49 911 395-3056 ?Fax +49 911 395-4084, rolf.buerkl@gfk.de
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