Consumer Confidence

There’s a startling amount of economic optimism in Germany these days.

At the beginning of the year, economists were pessimistic. A new sales tax increase that went into effect in January would kill consumer spending, they predicted. That hasn't happened. Instead, GfK, Germany’s largest market research institute, announced this week consumer confidence in the economy is at an all time high. At the same time, earnings forcasts escalated to a six year high.

"Consumption has the green light,” said GfK spokesperson Klaus Wübbenhorst.

Experts said they were surprised how quickly confidence came back after an initially weak start to the year.

The economic forecast increased almost eight points to 61 points, a record since the monthly consumer climate study began in 1980. One of the important reasons for this optimism is caused by positive developments in the employment market, GfK said.

Sunny outlook

And predictions are that consumer confidence will remain strong, with the typical German scepticism nowhere to be found.

Earnings forecasts were better in April than expected, due to a strong job market. Signs that the slump in consumer spending had ended could be seen in the retail industry.

“We see signs that the retail industry on a growth path, but not at the level of the national economy,” said Hubertus Pellengahr of the German Retail Association.

A run of warm spring weather has led to strong showings for home improvement stores and garden centers, he said.

Unemployment down

The upswing in consumer confidence helps the job market, said Federal Finance Minister Peer Steinbrück

“The clear expansion of employment with its positive consequences for private income and consumption makes it likely that the domestic demand will increase in the upcoming months,” Steinbrück said.

The government is counting on a decrease in unemployment of more than a million people by 2008. In the upcoming year the number of unemployed should be less than 3.5 million. That would be the lowest rate in more than a decade.

The government also increased its growth estimate to 2.3 percent. Until now, the government had predicted a 1.7 percent growth rate.

The monthly GfK consumer indicator is based on a survey of approximately 2,000 consumers. Substantial factors in determining the consumer climate are income expectations, earnings forecasts and purchases.

Strong euro won't stop boom

The euro is hovering at $1.36 a near-record high. The situation seems likely to continue without having a negative effect on the economy, as long as foreign demand remains strong.

The euro could go as high as $1.40 without causing major economic problems, economists said.