German Consumer Sentiment Increases for Third Month

By Jana Randow

July 27 (Bloomberg) -- German consumer confidence rose for a third month on retreating inflation and signs the economy is starting to recover.

GfK AG’s sentiment index for August, based on a survey of about 2,000 people, increased to 3.5 from a revised 3 for July, a 14-month high, the Nuremberg-based market-research company said in a statement today. Economists expected the index to hold at the initially reported July reading of 2.9, according to the median of 12 estimates in a Bloomberg News survey.

German business confidence rose more than expected this month, suggesting Europe’s largest economy is shaking off its worst recession since World War II. The Bundesbank said on July 20 that the economy shrank “only slightly” in the second quarter after its record 3.8 percent contraction in the first three months of the year.

“Economic pessimism on the part of consumers has declined,” GfK said. “Inflation is disappearing and people have more money in their pockets.” As a result, “private consumption currently remains a significant support for the economy.”

Germany’s inflation rate remained at zero in June, the lowest level in at least 13 years, due to falling energy costs and weakening demand. Oil prices have dropped by more than half from their peak last year.

GfK’s measure of economic expectations rose to minus 14 from minus 22.6. A gauge of income expectations increased to 1.8 from minus 3.3 and an index of consumers’ propensity to spend surged to 25.1 from 14.5.

National Elections

The government of Chancellor Angela Merkel, who will seek a second term in office in national elections in September, is spending about 85 billion euros ($121 billion) to revive the economy, which it predicts will contract 6 percent this year.

While German investor confidence unexpectedly dipped this month, there are signs that the worst may be over. Manufacturing orders rose for a third month in May, while exports and retail sales gained and industrial output surged the most in almost 16 years.

Stimulus packages will support household income while the “favorable price climate” and a car-scrapping incentive should encourage private consumption, the Bundesbank said on July 20.

“A sustained stabilization in the consumer climate will depend above all on the further development of the labor market,” GfK said. “Should there be a considerable rise in the number of unemployed,” it would “become an endurance test for consumer sentiment.”

Germany’s jobless rate rose to 8.3 percent last month. The Organization for Economic Cooperation and Development on June 24 predicted it will surge to 11.6 percent next year.

To contact the reporter on this story: Jana Randow in Frankfurt jrandow@bloomberg.net.