German Consumer Confidence Increases to 16-Month High, GfK Says

By Gabi Thesing

Sept. 25 (Bloomberg) -- German consumer confidence rose to a 16-month high as the economic recovery boosted households’ income expectations and willingness to spend.

GfK AG’s sentiment index for October, based on a survey of about 2,000 people, increased to 4.3 from a revised 3.8 in September, the Nuremberg-based market-research company said in a statement today. That’s the highest reading since June 2008.

The German economy, Europe’s largest, unexpectedly emerged from a recession in the second quarter as government stimulus measures, such as a 2,500-euro ($3,674) subsidy for people who scrap an old car to buy a new one, propped up consumption. Even though improving business and investor confidence suggest growth is accelerating, the recovery could sputter next year when government supports expire and unemployment increases.

“There have been a growing number of reports claiming that the economic decline is less severe than was feared several months ago,” GfK said in the statement. “The fact that the feared slump in the labor market has so far not materialized is also supporting the mood.”

GfK’s measure of economic expectations turned positive for the first time since June 2008 and jumped to 3.4 from minus 7.5. A gauge of income expectations rose to 16 from 8.8 and an index of consumers’ propensity to spend increased to 36.5 from 31.1.

Inflation

Low inflation is also helping to improve consumer optimism, outweighing “any fears over job losses,” the GfK said.

German consumer prices fell for a second month in August from a year earlier, dropping 0.1 percent. Oil prices have more than halved from their peak last year.

Henkel AG, the German maker of Persil detergents, said on Aug. 5 that the company’s consumer businesses will continue to perform well in the third quarter -- albeit with a “degree of deceleration.”

The government of Chancellor Angela Merkel, who will seek a second term in office in national elections on Sept. 27, is spending about 85 billion euros to revive the economy, which the IW economic institute in Cologne expects will contract 4.5 percent this year, before rebounding to 1.5 percent growth in 2010.

The Bundesbank expects unemployment to rise to 10.5 percent next year from 8.3 percent today, which may spook households into scaling back spending again.

“Further developments in the labor market will be decisive in terms of whether domestic demand can continue” to support the economy, GfK said in its statement.

To contact the reporter on this story: Gabi Thesing in Frankfurt gthesing@bloomberg.net.