German consumption day

Spending the crisis away? German consumers remain the silent helpers of the economy. Retails sales dropped in March by 0.3% MoM, from a downwardly revised -0.6% in February. At the same time, consumer confidence increased. The GfK index increased to 6.2 in May, its highest level in almost six years. Finally, German unemployment increased only slightly in April in seasonally-adjusted terms, indicating that the German labour market is the last island of euro crisis resistance.

This morning’s data confirm that the often written-off German consumers have become an important, though not strong, growth driver. Despite today’s drop in retail sales, the overall performance in the first quarter was still stronger than in the last quarter of 2012.

Looking ahead, all ingredients are in place to see a continuation of solid consumption. The labour market remains stable. Contrary to the rest of the Eurozone, German unemployment has hardly increased (yet) and remains close to its record lows. In addition, the increase in real wages, which started last year, should accelerate this year, driven by nominal wage increases of around 3% and low inflation. Just remember that in April, headline inflation dropped to 1.2% YoY.

All in all, Germans are still unlikely to become a bunch of shopaholics. Consumption is far away from being a spending spree and consumption will not be strong enough to spend the euro crisis away. However, gradual and decent consumer spending should continue supporting economic growth.