German GfK Consumer Climate Index Jumps but Recession Fears Intensify

German Consumer Confidence Jumps Despite Recession Worries

On Tuesday, October 29, markets turned their focus to the German economy amid rising expectations about a recession. The GfK Consumer Confidence Indicator increased from -21.0 for October to -18.3 for November, its highest level since April 2022.

Key highlights from the October survey included:

• Income expectations improved for the second consecutive month, rising by 3.6 points to 13.7. Notably, income expectations are up by a significant 29 points year-on-year.
• Rising wages and salaries, coupled with falling inflation, contributed to income growth.
• Higher income expectations pushed the willingness to buy indicator up 2.2 points to -4.7 points, its highest level since March 2022.
• However, consumer pessimism about the German economy intensified, with the economic expectations indicator declining by 0.5 points to 0.2 points.
• Sentiment toward the economic outlook aligned with the German government, which has forecast a 0.2% contraction in 2024.

Nuremberg Institute for Market Decisions (NIM) consumer expert Rolf Buerkl commented on the October survey, saying,

“But despite the increase, the level of Consumer Climate remains very low. The uncertainty caused by crises, wars and rising prices is still very much present and is preventing factors that encourage consumption, e.g. the real income growth, from taking full effect. Reports of a rising number of company insolvencies and plans to cut jobs or relocate production abroad are also preventing a more significant recovery in consumer sentiment.”

The Upswing in Consumer Confidence Could Boost Private Consumption

The October survey revealed a pickup in income expectations and consumers’ willingness to buy, signaling a likely increase in private consumption. Since private consumption accounts for over 50% of GDP, a positive trend in private consumption could give much-needed support to the German economy.

However, consumer sentiment toward labor market conditions and wages will remain crucial. Weaker labor market conditions could increase consumers’ willingness to save, potentially impacting the German economy. Consumers’ income expectations improved, but concerns about the economic outlook suggest labor market uncertainty.

Notably, while consumer confidence improved, underlying economic risks and recession forecasts persist.

Consumer Confidence Impact on ECB Monetary Policy

Improved consumer confidence could reduce investor bets on a 50-basis point December ECB rate cut. A tighter labor market could support wage growth, fueling consumer spending and demand-driven inflation. A less dovish ECB rate path may keep borrowing costs elevated, dampening consumer spending and inflation.

The ECB faces a delicate balance, with improved consumer confidence potentially reducing rate-cut expectations, but recession fears maintaining pressure for accommodative policies. Uncertainty about December’s ECB interest rate decision is evident as markets give a 50% chance of a 50 bps December rate cut.

Expert Views on the German Economy and ECB Rate Path

Pictet Wealth Management Head of Macroeconomic Research Fred Ducrozet commented on the German economy and the need for further ECB policy support, stating,

“The nail in the coffin? Job cuts deepen in Germany, and pricing power wanes. The ECB will be under growing pressure to move below neutral, and fast.”

Oliver Rakau, Chief Germany Economist at Oxford Economics remarked on October’s PMI data, stating,

“The PMIs’ GDP signal hasn’t been too accurate lately, but what really should concern the ECB is the price and employment signals from today’s October PMIs. Will they go big in Dec? Odds are rising. Should they go big? Yes, surely. And drop this “sticky” nonsense narrative.”

EUR/USD Reaction to German GfK Consumer Climate Survey

Before the German GfK Consumer Climate report, the EUR/USD climbed to a high of $1.08190 before falling to a pre-report low of $1.08057.

However, EUR/USD reacted to the GfK Consumer Confidence report, the EUR/USD rose to a high of $1.08128 before falling to a low of $1.08052.

On Tuesday, October 29, the EUR/USD was down 0.02% to $1.08098.