Consumer climate

Consumers have pinned their hopes on an early end to the crisis. A closely watched study on consumer confidence suggests that a combination of economic optimism and record-low inflation has German consumer confidence surging in August.

The forward-looking GfK index, which was released on Monday, rose to an estimated 3.5 points for August from 3.0 in July.

"After some economic institutes signalled an end to the economic downturn, the economic pessimism on the part of the consumers has also declined. Inflation is disappearing and people have more money in their pockets," says the report.

Inflation in Germany had hit a record of zero percent in May, in June inflation stood at 0.1 percent. Analysts even predict falling prices for the coming summer months - a phenomenon not seen for more than 20 years.

At the same time, interest rates offered by banks are lower than they have been for years so that there's little incentive for people to keep their money in the bank.

Stable prices have managed to trigger consumer spending - especially on larger purchases like household appliances and home entertainment.

The government's program in which it pays cash to people who scrap their old cars for new models has lead to a surge in automobile purchases.

Rising unemployment threatens to reverse confidence

Another reason for the upbeat view of the country's economic prospects is the fact that unemployment has not yet risen to the extent many had feared it would.

Experts however warn of a sharp rise in unemployment in the months to come as soon as the global recession starts to catch up with Germany's labour market. The assumption that the steep economic downturn has come to an end could therefore be premature.

"The acid test for the consumer climate still lies ahead. A long-lasting stabilisation of the consumer climate will depend on how the labor market develops in the future. If the unemployment figures climb high in late autumn, this will be a test for consumer confidence," the report says, adding that based on a long-term comparison, the consumer climate index is still at a very low level.

The GfK report comes only days after a report that German business confidence improved for the fourth consecutive month in July. On Friday, the business climate index released by the Institute for Economic Research (Ifo) exceeded economists' expectations by rising to 87.3 points after reaching a seven-month high in June of 85.9.

ai/Reuters/dpa/AFP
Editor: Chuck Penfold