Market Analysis

German consumer sentiment is projected to decline slightly in July, ending a four-month streak of increases, as households, faced with higher prices and a sluggish economic recovery, choose to save rather than spend, according to a survey released on Wednesday.

The consumer sentiment index, jointly published by GfK and the Nuremberg Institute for Market Decisions (NIM), unexpectedly dropped to -21.8 for July, down from a slightly revised -21.0 in June.

Analysts surveyed by Reuters had anticipated an increase to -18.9.

This index, along with other indicators such as the Ifo business climate index and the HCOB composite PMI, which also unexpectedly fell this month, suggests that Europe's largest economy faces a challenging path ahead.

"The recent halt in the upward trend of consumer sentiment highlights that the journey out of weak consumption will be difficult and setbacks are possible," said NIM consumer analyst Rolf Buerkl.

Income and economic expectations both saw moderate declines, while the willingness to buy remained stagnant at a low level and the already high willingness to save increased slightly.

"The slight uptick in Germany's inflation rate in May is clearly increasing consumer uncertainty, as reflected in the higher willingness to save," Buerkl noted. Inflation rose to 2.8% in May due to higher service prices.

A sustained recovery will only occur when consumers have planning security, which will return if price pressures are reduced and future prospects are clarified, he said.

"This also means that the government must quickly and clearly communicate the burdens and reliefs people will face as a result of the upcoming budget discussions," Buerkl added.

The consumer climate indicator predicts the progress of real private consumption for the following month. A reading above zero indicates year-on-year growth in private consumption, while a value below zero suggests a decline compared to the same period the previous year. According to GfK, a one-point change in the indicator corresponds to a 0.1% year-on-year change in private consumption.

The "willingness to buy" indicator measures the balance between positive and negative responses to the question: "Do you think now is a good time to buy major items?"

The income expectations sub-index reflects expectations regarding household finances over the next 12 months.

The business cycle expectations index indicates respondents' views on the general economic situation for the coming 12 months.

Paraphrasing text from "Reuters" all rights reserved by the original author.