German growth, confidence create virtuous circle

26th August 2010, Comments 0 comments

Record growth is lifting the spirits of cagey German consumers, the GfK research institute said Thursday as its household confidence index and ECB data suggested more support for Europe's biggest economy.

GfK's indicator of household sentiment posted a small rise to 4.1 points from 4.0 a month earlier, a figure that was itself revised higher, thanks to significant increases in expectations for the economy and personal incomes.

"The extremely good news on the economic development and continued positive reports on the labour market have led to robust consumer sentiment in August," a statement said.

UniCredit economist Alexander Koch said it was the highest level of confidence since October 2009, and added: "It is all about the labour market."

But GfK stressed that "consumer sentiment in August is strongly influenced by the substantial rise in German gross domestic product in the second quarter of this year."

The German economy posted record growth of 2.2 percent from the previous three-month period, and the central bank has forecast a full-year expansion of around 3.0 percent.

Meanwhile, the European Central Bank said eurozone bank loans to the private sector gained 0.9 percent in July, following a 0.5 percent rise in June.

The June figure was revised higher from an initial estimate of a 0.3 percent rise, and a breakdown of the ECB data showed that lending to households, in particular for mortgages, was in large part responsible for the increases.

Lending to businesses contracted, but at a smaller rate than in past months, and might be the result of companies increasingly seeking funds in financial markets rather than asking their bank for a loan.

Germany's export-oriented economy could thus get sustained support from domestic demand, with private consumption, traditionally a weak point, gaining a healthy 0.6 percent in the second quarter.

"At least in the coming months it looks as if a new proverb could read: 'Don't count out the German consumer'," ING senior economist Carsten Brzeski said.

Households have been cheered by better prospects for employment and an end to short-time work schemes used as the country was hit by its worst post-war recession last year.

In July, German unemployment stood at 7.6 percent of the workforce.

GfK's survey of some 2,000 people found "there are currently good indications that consumer sentiment in Germany is experiencing a sustained upward trend."

It was released a day after the Ifo research institute said German business confidence had hit a three-year high, regaining levels seen before the global financial crisis erupted in mid 2007.

GfK nonetheless noted that planned government austerity measures and the end of stimulus programmes "are evidently preventing a more substantial upward trend" in household confidence.

Social security charges are due to increase next year and a freeze in pension payments will affect the elderly who account for more than 20 percent of private consumption, Koch noted.

But if business activity keeps expanding, inflation stays under control and job prospects improve further, "private consumption can be expected to contribute its part in the strong recovery of the German economy this year," GfK concluded.

© 2010 AFP

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