Consumer sentiment in Germany unexpectedly worsened in July, interrupting the recovery of the previous four months. Expectations for economic development, personal incomes, and the desire to buy weakened as the propensity to save increased.

The latest survey by the German GfK Institute, conducted among about 2,000 consumers between May 30 and June 10, 2024, revealed this downturn. GfK's consumer sentiment index for July fell to -21.8 points from -21.0 points in May, missing market expectations for an improvement to -18.9 points. This marks the first deterioration in consumer confidence in Germany in five months.

Rolf Bürkl, an expert at the GfK institute, noted, "The break in the recent uptrend in consumer sentiment shows that the path out of sluggish consumption will be difficult and there could always be some pullback."

He attributed the increased uncertainty among consumers to a slightly higher rate of inflation in Germany in May, which also led to a rise in the desire to save. Bürkl emphasized that for a sustainable recovery in consumer sentiment, consumers need planning certainty and a clear future outlook, which the government must communicate effectively during upcoming budget discussions.

The GfK Institute uses three sub-indices—for economic expectations, income expectations, and propensity to shop—to determine sentiment for the following month. In June, the index measuring consumer income expectations fell for the second time after four consecutive months of growth, dropping by 4.3 points to +8.2 points. Despite this decline, it remains nearly 19 points above its June 2023 level.

The moderate decline in income expectations is likely due to rising inflation, which accelerated slightly in May to 2.4% year-on-year. This slight increase in inflation moved it away from the European Central Bank's target level of 2 percent. An in-depth analysis of income expectations showed that 62% of respondents cited rising prices as the main reason for their pessimism about incomes.

In June, the propensity to buy also weakened, with the corresponding index decreasing by 0.7 points to -13.0 points. This index has remained at extremely low levels for more than two years. Rising prices have led households to spend more on food and energy, reducing their financial resources for larger purchases. The lack of planning certainty has also led people to build up reserves for emergencies, further diminishing robust consumption.

Meanwhile, hopes for a quick economic recovery this year diminished in June, with the index of consumer expectations for the economy falling by 7.3 points to 2.5 points. This decline ended four consecutive months of improvement.

Despite the June decline, it is assumed that the economic recovery in Germany is likely to continue in the second half of the year, though consumers expect it to be weak. Some economic experts do not anticipate any significant acceleration in the economic recovery until next year, according to GfK.