Economics Germany: Putin shock spreads to consumers

Economics
Holger Schmieding
Christian Schulz
Rob Wood
+44 20 3207 7889
+44 20 3207 7878
+44 20 3207 7822
[email protected] [email protected] [email protected]
29 August 2014
Germany: Putin shock spreads to consumers
Consumer confidence is following industry and services downwards
1.5
Industrial confidence
Consumer confidence
1.0
Services confidence
0.5
0.0
-0.5
-1.0
Jan 2012
Jul 2012
Jan 2013
Jul 2013
Jan 2014
Jul 2014
EU Commission sentiment indicators for Germany adjusted for mean and standard deviation since 2000. Source: EU
Commission
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



Not safe anymore: Until recently, Germany’s notoriously nervous consumers had been remarkably
unaffected by geopolitical risks, at least when they filled in questionnaires for consumer confidence
surveys. Despite the uplift from the World Cup victory, that has changed now. With Russia
escalating its semi-covert war against Ukraine, the GfK consumer index fell from 8.9 in August to
8.6 for September and the EU Commission’s German consumer confidence index recorded its
biggest monthly drop since the heyday of the euro crisis this August.
External shocks are propagating to domestic demand: Industrial confidence levelled off in
November last year. Slowing Chinese growth and later the big freeze in the US had curtailed the
gains of Germany’s exporting manufacturers. Growth recovered in these countries and may now be
cushioning the Putin effect a bit. The services sector peaked in February, just before Russian
President Putin annexed Crimea at gunpoint.
Worries about the world: Despite the setback, both the GfK index and the EU Commission
measure stayed near record highs for Germany. Income expectations and purchasing intentions
hardly moved at all. However, consumers’ expectations for the general economy plunged.
Consumers are not concerned about their own incomes or jobs. They are worrying about general
uncertainty. That points to some impact from the worsening flow of geopolitical news.
The fundamentals for consumption remain very strong: Germany’s jobs miracle has continued
unabated so far this year. German companies created 140k new “core” jobs, ie positions paying
enough to be liable for social security contributions, in the second quarter. Nominal wages rose by
2.4% yoy in Q2, with inflation below 1%. German households remain in a comfortable position and
enjoy low inflation. Once geopolitical concerns ease, confidence should snap back fast.
The short-term risks are increasing: The conflict in Ukraine is deepening. The shock to
confidence is spreading to some extent from industry to consumers. As long as the conflict rages,
confidence will probably decline further. However, the labour market will likely remain fairly
resilient. While some German consumers may postpone purchase of cars for a while amid such
uncertainty, they will likely continue to flock to the beaches of Spain and Greece.
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