Europe’s largest economy was already suffering from a number of challenges before Putin’s invasion of Ukraine – with a surge of Covid infections over the winter and supply chain issues causing major headaches for German companies. Inflation, a problem even before the Ukrainian crisis, is rapidly reaching record levels. According to data company GfK, German consumers are now increasingly concerned about economic risks and are changing their behavior. Rolf Bürkl, consumer expert for GfK, said: “In February, hopes were still high that consumer sentiment would pick up significantly with the foreseeable easing of pandemic-related restrictions.
“However, the start of the war in Ukraine dashed those hopes.
“In particular, rising uncertainty and sanctions against Russia have driven energy prices soaring, putting a strain on overall consumer sentiment.”
The GfK Consumer Confidence Index is now expected to fall seven points in April, accelerating declines already seen.
The index is formed using survey data from consumer interviews measuring areas such as income expectations and the likelihood of making a major purchase.
March data revealed that expectations for the economy had fallen to their lowest levels since the first lockdown in spring 2020.
Meanwhile, income expectations were at their lowest since 2009 following the financial crisis.
According to GfK, consumers are now seeing their purchasing power “melt away” thanks to the sharp rise in energy prices, with confidence in a major purchase also declining.
Melanie Debono, senior economist for Europe at Pantheon Macroeconomics, said: “The decline in GfK’s consumer sentiment stock, to a common 22-month low, is a clear sign that the war in Ukraine and the rise in l inflation are weighing heavily on consumer sentiment.”
She added: “Consumers are paying attention and expecting to save more – the Willingness to Save Index jumped in March – which bodes ill for any gains in household spending over the coming quarters.
“Meanwhile, expectations for the economy also fell, by 33 points to -8.9, supporting the Bundesbank’s forecast that the German economy entered recession in the first quarter.”
Germany has already seen its economy shrink in the final months of 2021, fearing that this pattern could repeat itself in the first quarter of this year, plunging the country into recession.
The challenges are not unique to Germany, however, with survey data for France released today also revealing falling consumer sentiment.
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According to INSEE, the share of households who believe that the standard of living will improve in the next 12 months has fallen sharply, while fears around unemployment have also increased.
Inflation emerged as perhaps the main source of concern, with a growing share worrying about rising prices over the next 12 months.
The timing comes as President Macron hopes for positive sentiment in the economy ahead of the upcoming French election.
Such a collapse in confidence also worries the European Central Bank (ECB), which has described it as “quite significant and substantial”.
In an interview with Politico this week, ECB chief economist Phillip Lane warned: “Europe may have to get used to higher prices.”