It starts out un-alarmingly. The optimism of German consumers weakens somewhat, according to the forward-looking Gfk survey, conducted on a monthly basis for the European Commission. So the overall index fell to 8.6 for September, from 8.9 in August. It was the first decline since January 2013.
The index bottomed in late 2008 below 2, after a breathtaking crash during the financial crisis. In late 2007, it had hovered above 9. Early 2014 was the first time since the prior bubble that the index broke above 8. And August’s level of 8.9 represented an “extremely optimistic economic outlook,” as Gfk calls it. German consumers have been feeling good, and according to the headline index, they’re still feeling good up there somewhere in the rarefied air above 8.
But beneath the surface, there is serious trouble. Gfk reports that the sub-index of economic expectations, “in light of the intensified state of international affairs, completely collapses.”
It plunged 35.5 points to 10.4. The worst monthly plunge since the beginning of the survey in 1980. In a single month, it nearly wiped out all the gains of the boom of the last 12 months. Gfk cites the escalation of the situation in Iraq, Israel, the Eastern Ukraine, and particularly “the faster rotating sanctions spiral with Russia.”
Since there appears to be no sustainable solution to any of the trouble spots, consumers are showing increased uncertainty about the possible consequences for the German economy, Gfk reports. “Particularly the sanctions against Russia, which have already hit exports noticeably, could become a real danger for the German economy.”
The two sub-indices for income expectations and propensity to spend have been spared so far this type of brutal collapse, though they both fell from their lofty perches. Income expectations hit an all-time record in August. But for September, the index dropped 4.6 points to 50.1. The propensity to spend dropped 1.7 points to 49.3. At these levels, both are still “relatively robust.”
Gfk credits “the continued stable domestic conditions, stable employment levels, good income development, and low inflation” for limiting so far the impact of collapsing economic expectations on income expectations and the propensity to spend.
ECB President Mario Draghi, along with inflation mongers in the new French government, at the Fed, on Wall Street, and elsewhere should take note: inflation, as the report points out repeatedly, is important to Germans. Watch what happens to German consumer attitudes – and spending – if you steal their income and scarce savings one bite at a time.
But dark clouds have already appeared over German consumer spending: Gfk cites the increase in the propensity to save in August as “the first indicator that the consumer will be more careful in the future and that the impulses for the propensity to consume could decline.”
For this still “relatively robust” propensity to spend to continue, “it is necessary from the consumer’s point of view, that the situation in the crisis regions does not escalate further, but that sustainable solutions are found.” Gfk then warns: “If domestic conditions deteriorate significantly in the wake of a possible further escalation, difficult times loom ahead for the economy.”
Given the new economic malaise in Germany [read… Sanctions Are Eating their Lunch: Russian CEO Begs for Bailout, German Economy Swoons], any decline in consumer spending, which grew at a measly 0.9% last year, could wreak real havoc, not just in Germany, but also in its most critical trading partner France, in Italy, and other struggling economies in the Eurozone. German consumers are infamous for closing their wallets. And if they do it again, after they finally started spending more, they’d quickly prick any remaining hopes for a “recovery” in the Eurozone.
Even the folks at the German Ministry of Finance very belatedly admit that sanctions caused Germany’s current economic swoon, as if they’d finally found my site where I’ve been explaining this to them with utmost patience for months. Hilarity ensued. Read…. This Is what Happens when otherwise Competent, Diligent, Hard-Nosed Bureaucrats Fail to Read my Stuff
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Incredible isn’t it? The US federal administration has absolutely no clue of the negative effects of the Russian sanctions! Farmers and producers are hurting bad! The EU will fall in to recession in 1 2 3. I also got a advise from a relative from Europe. If I’m to visit and speak English try to wear a Canadian T shirt if your life matters.
The US administration knows exactly what they’re doing. You really believe they couldn’t forsee negative effects on Germany, with all their intelligence, data, and capabilities?
Of course they could.
Now for your red pill. Governments aren’t trying to serve you, or improve your life, they’re vying for control and power, but realize they have to maintain a level of comfort for the drone consumer worker bees.
We subsidize their power, wealth, and lifestyle, so we must be appeased, nothing more.
The US couldn’t care less about the EU population, since 2000 they have been poisoning the EU economies with their financial products to not let the Euro become an alternative to the dollar to pay for oil.
The next stage, was to parachute one of their guys into the financial heart of Europe: Mario Draghi…. to control the Euro and to continue to weakening of the Euro. This was all aimed at keeping Europe and the Euro closely dependant on the US and the dollar…what if the EU would become too close with Russia, which as now is becoming reality, and they might want to do business in Euros and not dollar…
I knew those sanctions were/are a huge problem and when I read about it the first time only thought of getting closer to war. The media barely touched it.
We (citizens) in the US believe polices are made here with an international plan and not a national one at this point. I understand completely the frustration in the EU but remember they are all in the same bed and borders, language, and culture mean nothing. The Ukranian situation is only drawing lines in the sand and hasting the demise of the dollar and there are many schools of thought as to who and why this situation in Ukraine is what it is.
The way I see it is the US was very ready to allow massive QE while Europe kept the belt tight. This tells me the dollar is the planned currency to go down first. Drawing a line between the EU and the US is folly. The EU and the US governments feel the same about each others populace and their own: not much. They are working together.
Up until some point where countries possibly revolt from the EURO and start changing sides the course stays. The German heads of state have always done their own thing, general public feelings be %$$%$. (Think Greece)
France is still building ships for Russia so as usual I wonder just how informed us peons are in all of this and just how far off our thinking and information is compared to what really is going on. (My opinion comes with a caveat in that I admit I know I know very little about what really is going on out there.)
John 3:16
Sanctions don’t work. They disturb the free market for a short while but soon the goods will find an other way to an other customer and the demands will satisfied by other suppliers. For the buyers (Russia) prices will go up for a short while. For the suppliers (EU) prices will be downed for the same period.
Oversupply, undersupply will have a short life, free markets will clean up these unbalances because these windows of opportunity are profitable for merchants.
An other nice remark.
Politicians are calling for investments and try to let the sheeple consume more and more.
However. Investments need money to borrow. And who supplies the money ? The saver.
“The savers are not consuming !” shout our top economists.
But the savers are consuming !
Not by themselves but via the investors. The saved capital is being consumed, but not by its owners.
The owner of money, capital, isn’t able to NOT spend it ! ( except throwing it into the firewood)
So our leaders want to increase investments and decrease savings at the same time ?
Boooiiinggg !
Its gonna take a long while…..
I think the more fundamental problem is that US foreign policy has become an utter disaster of late. This latest harebrained plan to bomb both Syrian rebels and the Syrian regime tells you all you need to know about the cluelesness of the US. It is a world power that slowly seems to be going rogue on us, the rest of the world, because it lacks wisdom, long term vision and balanced judgement. Yes, we still respect it because of its firepower and historical credentials, but that is fading fast, especially when these economic sanctions would begin to bite in earnest.
I bet Germany is thinking very hard about how to distance itself from the US without stirring up to much trouble. It highlights an old problem between the US and the EU: they were never really equals, the US always called the shots and that is currently proving to be an undesirable, unhealthy situation, now that the EU should try to keep its ally in check before something really disastrous happens.
“I think the more fundamental problem is that US foreign policy has become an utter disaster of late”
Exactly what Ron Paul told us a couple of years ago. Our foreign policy is creating terrorism by invading all these countries based on lies.
Ruined Ukraine belongs to Russia, not to ruined European Union!
EU and USA are the initial real Ukraine warmongers!
Russia will now export less money to Germany, and this is very good for Russia!
Christian EU and christian Russia should ASAP merge again ISIS, but USA has made them foes, and EU is fallen into the trap…
Jean-Francois Morf
August 31, 2014 at 8:35 am
Mr. Morf is so very right!
There is nothing more to say.