Has consumer optimism returned in Germany as Christmas approaches?

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The German GfK Consumer Confidence Index rose to -27.8 heading into December from -27.8 points the month before, suggesting consumers in Europe's biggest economy are feeling more optimistic as the festive season approaches.

The index, which takes willingness to buy, income expectations and business cycle expectations into account, showed just a marginal increase, however, which was largely put down to the Christmas and holiday season increasing consumers’ willingness to buy.

However, the overall mood was still very much clouded by uncertainty, as Germany’s economy struggles with the effects of slow economic growth and weaker-than-expected demand.

Germany’s gross domestic product (GDP) contracted 0.1% in the third quarter (Q3) of 2023, driven lower by shrinking private spending and inventory changes due to high interest rates and soaring inflation.

The manufacturing sector also continues to struggle, although November’s manufacturing purchasing managers’ index (PMI) numbers were slightly more encouraging, rising to 42.3 from 40.8 in October.

However, global Purchasing Managers’ Index data for the country, which measures whether market conditions are shrinking, stable or growing, came in at 47.1 in November 2023. This was a step up from October's 45.9, while also being the highest since July.

It’s not all good news though, as PMI figures under 50 indicate contraction in an economy. For Germany, November was the fifth month in a row of contraction, which could point towards a looming recession.

Income expectations for December in the German consumer confidence index came in lower at -16.7, down from 15.3 in November. Business cycle and economic expectations stayed mostly flat, at -2.3, up from -2.4 in November.

However, there were very few, if any signs of a sustainable recovery, with most indicators pointing simply towards a seasonal change in mood. Therefore, it is quite likely that sentiment will tank once more, come January.

What's causing the German economy to slump?

The housebuilding and real estate sector is one of the biggest reasons why the German economy is struggling at the moment, with new orders considerably low. Existing orders are also being cancelled at a faster rate, which could lead to a serious slump in the sector once order backlogs have cleared.

Furthermore, the recent budget crisis and government spending freeze are further contributing to what is already a chaotic situation. Now, investments in green initiatives have also been put on hold.

Higher inflation has been another significant driver of the economic contraction. However, with inflation slowly coming under control, there is more hope that the European Central Bank (ECB) may end its monetary tightening policy in the next year.

If so, this should also considerably reduce interest rate pressure on German consumers, thus resulting in higher consumer spending, as disposable income rises.