Some of the euro zone’s brightest consumers are also found in Germany, one of the region’s worst-performing economies.
The discrepancy became clear on Tuesday when it emerged that the country was the only major member of the currency bloc to suffer an output decline in the second quarter. Simultaneously released survey data for July showed further improvement in consumer confidence in Germany.
Sentiment in Europe’s biggest economy is now just below the level it was in February 2022, when the slump took hold after Russia’s invasion of Ukraine, according to indicators compiled by the European Commission. France and Italy are far from that threshold.
Higher wages partly explain the disconnect between increasingly cheerful consumers and the stop-start trajectory of the country’s economy, which has grown by a quarter in less than half of Prime Minister Olaf Scholz’s tenure.
“Real wage developments are influencing this,” said Christian von Berg, chief economist at credit insurer Coface. “While consumer sentiment is not as strong as it was before the pandemic, purchasing power is rising.”
The combination of rising wages and weakening inflationary pressures is becoming more pronounced. In the first quarter of 2024, German workers experienced historic real wage increases. This was his highest since the data series began in 2008.
Other German sentiment indicators also improved in July. The country’s service confidence index rose, but fell in almost all countries in the euro area.
GfK said its independent Consumer Conditions Index also showed an increase in Germany last month, with improved income prospects and some brightness in purchasing power being the main factors behind the improvement in sentiment.
More temporary factors other than wages may also be at play. One reason may be the influence of the UEFA European Football Championship, which was hosted by Germany for one month starting June 14th.
Thousands of fans from all over the continent traveled to the country, and the event was expected to attract 2.5 million sports enthusiasts to Berlin alone. The German team advanced to the quarterfinals, but lost to Spain.
“This is likely due to the euphoria caused in a large part of the population by the European Football Championship in Germany,” said Rolf Buerkl of the Nuremberg Institute for Market Decision Making. “Whether this effect is sustainable remains to be seen.”
However, past soccer tournaments show no clear pattern of lasting impact on emotions. Von Berg thinks Taylor Swift may have played a bigger role this time.
“The Eurocup did not contribute much, also considering the large amount of government spending on this event,” she said. “On the other hand, Taylor Swift’s seven concerts increased consumption without requiring expensive state contributions.”
Whatever the reason for German consumers becoming cheerful, they may struggle to maintain such an upbeat attitude. With the exception of Swift’s concert tour moving elsewhere and the end of the football championships, there may be limits to how much companies can raise salaries in a depressed economy.
The current number of bankruptcies is the highest since the summer of 2016. A decline in industrial production in Germany, once a powerhouse manufacturing hub, could threaten the current upbeat mood by making it harder for companies to keep raising wages.
