German Consumer Sentiment Drops Amid High Inflation and COVID-19 Uncertainty

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German consumers are feeling less optimistic about the economic outlook and their purchasing power, according to a survey by the GfK institute. The consumer sentiment index fell to -25.5 heading into September, the lowest level since February 2023.

Inflation and COVID-19 Weigh on Consumer Mood

The GfK survey, which was conducted from August 3-14 among 2,000 respondents, showed that income expectations and willingness to buy declined sharply in August, while business cycle expectations also turned negative. The survey period coincided with a surge in COVID-19 cases in Germany and other European countries, fueled by the highly contagious Delta variant. The rising infection numbers have raised fears of new restrictions and lockdowns, which could hamper the economic recovery.

Another factor that is dampening consumer sentiment is the persistently high inflation rate in Germany, which reached 3.8% in July, the highest level since 2008. The GfK said that inflation is eroding the purchasing power of consumers and reducing their propensity to spend. The survey also found that consumers are increasingly worried about the impact of climate change and extreme weather events, such as the devastating floods that hit parts of Germany in July.

German Consumer Sentiment Drops

“The chances that consumer sentiment can sustainably recover before the end of this year are dwindling more and more,” said GfK consumer expert Ralf Buerkl.

Private Consumption Expected to Be a Drag on Growth

The GfK said that since consumer sentiment is likely to remain at a low level in the coming months, private consumption will not make a positive contribution to overall economic development this year and will rather be a burden on growth prospects in Germany. Private consumption accounts for about 55% of Germany’s gross domestic product (GDP).

The GfK’s forecast is in line with other indicators that suggest a slowdown in the German economy, which rebounded strongly in the second quarter of 2023 with a growth rate of 1.6%. However, the Ifo business climate index, which measures the confidence of firms in various sectors, fell for the second consecutive month in August, indicating a loss of momentum. The ZEW economic sentiment index, which reflects the expectations of financial market experts, also dropped significantly in August, reaching its lowest level since November 2020.

The German government has revised down its growth projection for 2023 from 3.5% to 3.0%, citing supply bottlenecks in some industries and uncertainty over the course of the pandemic. The European Commission has also lowered its growth forecast for Germany from 3.4% to 3.1%.

Consumer Sentiment Varies Across Europe

The GfK survey also compared consumer sentiment across several European countries, based on data from July. The results showed that consumer confidence varied widely depending on the pandemic situation and vaccination progress in each country.

The UK had the highest consumer sentiment index at -7.8, followed by France at -10.4 and Italy at -12.9. These countries have achieved high vaccination rates and have eased most of their COVID-19 restrictions. However, Spain had a much lower index at -23.2, reflecting a resurgence of infections and a slower vaccination campaign.

Germany’s index was -24.4 in July, slightly better than Poland’s -25.9 and considerably better than Turkey’s -40.9. The GfK said that Turkey’s consumer sentiment was severely affected by the depreciation of its currency, the lira, which has increased inflation and reduced purchasing power.

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