German consumers not yet ignited by Merz magic

While German business confidence has increased every month since the start of the year on growing optimism that the new government will bring back growth, consumers remain sceptical. The just-released GfK consumer climate index dropped to -20.3 in June, from -20.0 last month.

Since the start of the year, consumer confidence has shown minimal improvement. While consumers share the growing business optimism, inflation fears and a higher propensity to save are weighing on confidence.

Private consumption surprised to the upside in the first quarter of the year. However, looking at the bigger picture, private consumption has not yet fully recovered from the energy price shock in 2022. In fact, the worsening of the labour market and increased geopolitical uncertainty are still concerning German consumers.

Looking ahead, recent business optimism on the back of the new government’s investment plans has not yet ignited consumers. German consumers’ reluctance to open their wallets is actually not the result of excessive caution or fearmongering but a very rational behaviour. Up to now, the government’s fiscal stimulus plans have been almost exclusively aimed at companies, not households. It will need another turning of the labour market (to the positive) and a significant improvement in purchasing power before private consumption can substantially pick up again.