Germany: Private consumption remains on track

Germany: Private consumption
remains on track

• Retail sales plummeted 2.3% in September. The chronically volatile monthly data do, however, suggest subsequent upward revisions. And despite the weak numbers, the qoq reading will be exceeded slightly.
• Together with the recovery in auto retail sales, private consumption should again have provided GDP with tangible support in the summer. And with the solid labor market situation, the odds that consumption will also see a healthy upward trend in 2011 are good.
• But the retarding factors of fiscal consolidation and demographics, above all via the falling purchasing power of pensions, argue against a very strong consumption cycle. For 2011, we expect a gain of 1½%, after a meager average +0.2% since 2002.

Disappointing retail sales
The German domestic economy staged a comeback in the spring. Almost 2/3 of the exceptionally strong growth of 2.2% qoq came from consumption and investment. Even though the weather-related massive spring recovery in construction provided the result with tangible support, the improvement in domestic demand was also strong, even adjusted for extraordinary factors. Not least private spending was able to end the consumption recession with a respectable qoq gain of 0.6%.

The expectations of an increasingly broad-supported German economic upswing have, however, not been reflected at all recently in the official retail sales numbers. After a mom decline of 0.4% already in August, a 2.3% slump in real retail sales was reported for September.

In our view, however, the disappointing retail sales numbers do not permit the conclusion that private consumption – as was already frequently the case in past years – will lose steam quickly again. Chronically volatile retail sales data The preliminary monthly retail sales data are based in large part on estimates and have, therefore, always been chronically volatile. The official retail sales numbers are even only calculated with a delay of up to three years. In many cases, this subsequently resulted in very strong revisions of the monthly numbers. In the last five years, the monthly rate of change was revised up by an average of 0.3 percentage points. The highest adjustment here was even 3.1 percentage points! The results for 2010 already show clear upward revisions.

It is, therefore, highly probably that the September numbers will also look much more favorable in a few months. Experience shows that even a mom gain instead of the current 2.3% decline cannot be ruled out entirely. Furthermore, the data currently available for retail sales ex autos still show - despite the recent weakness – a slight increase for the third quarter compared to the spring reading of 0.2%, even without an upward revision.

Recovery in auto retail sales
Above and beyond that, auto sales stabilized further in the summer. These had still corrected down strongly at the beginning of 2010 after the temporary boom last year triggered by the scrapping premium for old cars. Since March, however, the sales numbers have recovered again steadily from the depressed levels. After an increase of 6.0% in the second quarter, the nominal sales reported in the summer are a further 2.4% above the level of the preceding quarter.

Overall, therefore, it is quite safe to assume that the GDP numbers for the third quarter will show an ongoing recovery in private consumption. The Federal Statistical Office will release the GDP Flash on Friday, 12 November; the individual components will then be released on 23 November.

Solid labor market prospects
Looking forward, the environment is also favorable for an ongoing upward trend in private consumption. The key player here is the labor market. It remains very robust. With the help of the government-subsidized short-time work and above all the more flexible collective wage agreements, which in many industries now permit a reduction of the working week without full wage compensation, employers have held the workforce relatively stable during the crisis. There was temporarily "only" a tangible decline in temporary work. With the V-shaped recovery of foreign demand, there was however recently again a strong rise in temporary work contracts and an increase in the total volume of working hours. Even though we expect in turn a more moderate further recovery of the employment numbers because of the dampening effects of the more flexible working hours on unemployment during the crisis, overall the labor market outlook remains solid. Recently, unemployment fell to its lowest level in 18 years, below the 3 million mark. And except in the construction sector, corporate hiring plans are clearly in expansion territory.

This is reflected impressively in households’ very low unemployment expectations (see chart next column).
Consumption outlook: Respectable but no boom The combination of an again rising working hour volume and
moderate real wage growth (see here also: Wage demands on the rise, Economic Special dated 30 August 2010) is having a positive impact on disposable incomes.

Together with the currently very positive assessment of job security, the odds for an ongoing, healthy upward trend in private consumption are quite good. We do not, however, see a very strong consumption cycle. The retarding factors are too strong for that to happen.

On the one hand, households will experience tangible cuts because of the austerity measures passed by the federal government. After the economic stimulus plan brought substantial relief for households up to and including this year, there is a net strain for 2011. The direct impact of the future package of the conservative federal government (which next year is to result in savings totaling EUR 11.2bn) on household incomes may be relatively slight at close to EUR 1bn via a reduction of the parental allowance and the cut in several social transfers. On top of that, there is however the renewed increase of social security contributions. The contribution to unemployment insurance rises from 2.8% to 3.0% of gross income. And the contribution to statutory health insurance increases on average from 14.9% to 15.5%. Overall, therefore, households are facing additional strains in 2011 totaling close to EUR 5bn or 0.2% of GDP.

Second, the demographic development is having a noticeably dampening effect. The German population already peaked as far back as 2004, and probably fell further in 2010 as well to roughly 81.5 million (see chart next page), not least because of weak net immigration.

In the process, the share of the older population is rising. Pensioners already account for over 20% of private consumption. And this year they again had to forego an increase in nominal pensions because of the recent recession, which despite moderate inflation expected at around +1.0% in 2010 resulted in a perceptible real income loss. Since 1995, the purchasing power of the standard pension has fallen by a total of 9% (see chart).

Factoring in the key factors, we expect the second half of 2010 and also next year as a whole to bring a stable upward trend for private consumption expenditures. While the growth should not be intoxicating in the coming year with 1½%, above all compared to the preceding years since the bursting of the high-tech bubble, it should be very respectable. Since 2002, the increase in real consumption on average for the year has averaged only a meager +0.2%.
http://www.unicreditmib.eu/
Full report: Germany: Private consumption remains on track