German GfK Consumer Confidence Rose for a Second Month in July

By Christian Vits

June 23 (Bloomberg) -- German consumer confidence rose for a second month as the economic outlook brightened and retreating prices boosted household purchasing power.

GfK AG’s sentiment index for July, based on a survey of about 2,000 people, increased to 2.9 from a revised 2.6 in June, the Nuremberg-based market-research company said in a statement today. Economists expected the index to remain unchanged from an initially reported 2.5 in June, according to the median of 24 estimates in a Bloomberg News survey.

German business and investor sentiment increased this month on hopes that interest-rate cuts and government stimulus packages will lift the economy out of its worst recession in more than six decades. The coalition government led by Chancellor Angela Merkel, who faces national elections in September, is spending about 85 billion euros ($118 billion) to stimulate growth. Still, the Bundesbank expects the economy to shrink 6.2 percent this year and stagnate in 2010.

“Consumer hopes of economic stabilization are intensifying and accordingly, economic expectations are increasing moderately,” GfK said. “Reports that the inflation rate stood at zero percent in May are having a positive effect on income expectations and the propensity to buy.”

Germany’s inflation rate fell to zero in May for the first time in at least 13 years on lower energy costs and weakening demand. Oil prices have dropped by half from their peak last year, cutting the cost of gasoline and heating oil.

‘Improving Slightly’

GfK’s measure of economic expectations rose to minus 22.6 from minus 28.3. A gauge of income expectations increased to minus 3.3 from minus 9.3 and an index of consumers’ propensity to spend rose to 14.5 from 12.5.

“The consumer climate is therefore improving slightly, although the level of the indicator remains comparatively low,” GfK said.

The economy is in a “stabilization phase,” Bundesbank President Axel Weber said last week. “However, we’re far away from a significant pick-up,” he added. The Frankfurt-based central bank forecast that exports will drop 16.8 percent this year, while unemployment will rise to 10.5 percent in 2010 from 8.2 percent today.

Still, there are signs that the worst may be over. Manufacturing orders held steady in April after increasing in March, while a measure of manufacturing activity rose to a seven month high in May.

“It is unclear whether” the rise in confidence “marks the beginning of a sustained recovery in consumer mood,” the report said. “The development of the employment market over the coming weeks will be decisive.”

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