German Consumer Confidence Declines to Five-Year Low

By Christian Vits

July 28 (Bloomberg) -- German consumer confidence dropped to the lowest in more than five years as soaring energy prices sapped purchasing power and the economic outlook deteriorated.

GfK AG's index for August, based on a survey of about 2,000 people, fell to 2.1, the lowest since June 2003, from a revised 3.6 in July, the Nuremberg-based market-research company said in a statement today. Economists predicted the gauge would fall to 3.5 from an initial July estimate of 3.9, according to the median of 25 estimates in a Bloomberg News survey.

Record oil and food prices pushed inflation in Germany to 3.4 percent last month, squeezing disposable incomes just as the euro's gains and a deepening U.S. housing slump curbed demand for exports. Business confidence fell the most since the Sept. 11 terrorist attacks in 2001 and investor confidence dropped to a record, signs growth is faltering in Europe's biggest economy.

``Three things are weighing on sentiment: inflation, inflation and inflation,'' GfK Chief Executive Officer Klaus Wuebbenhorst said in an interview on Bloomberg Television. ``And the European Central Bank raising rates also makes consumer loans more expensive.'

A sub-index measuring income expectations decreased to minus 20 from minus 7.2 and a gauge of consumers' propensity to spend fell to minus 26.2 from minus 23.7. A measure of economic expectations plunged to minus 8 from 7.5.

Citizens' Fears

``Along with fears of high inflation, many Germans are concerned that there will be a more marked cooling of the economy than previously anticipated,'' GfK said. ``News from the U.S. of the continuing gloom in the financial markets support these assumptions and not least, the continuing high value of the euro represents a hazard to exports.''

The worst U.S. housing slump since the Great Depression has pushed up the cost of credit globally and roiled financial markets. The world's biggest financial companies have posted almost $470 billion in writedowns and credit losses since the start of last year after the subprime mortgage market collapsed.

Oil prices surged to a record $147.27 a barrel this month and are up 61 percent in the past year. In the same period, the euro has appreciated 15 percent against the dollar, making European exports less competitive.

German sales abroad dropped the most in almost four years in May and manufacturing orders fell for a sixth month. The country's benchmark DAX share index has declined 20 percent this year.

Still, unemployment has dropped to a 16-year low of 7.8 percent, which may provide some support to consumer spending as labor unions push for more pay. Deutsche Lufthansa AG faces disruptions today as employees at Europe's second-largest airline stage strikes over pay.

The ECB raised its benchmark rate by a quarter point to 4.25 percent this month to curb inflation in the 15-nation euro region. It may raise rates again by March even as economic growth slows, Eonia forward contracts show.

``We haven't exhausted our room for maneuver,'' ECB council member Klaus Liebscher said in an interview last week.

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net