Consumer Sentiment Improved in Eastern Germany

After improving in November, consumer sentiment in Germany is set to deteriorate in December as households fret about the new government's plans to raise value-added tax, a new poll showed on Monday.

"The arguments over the political program and over people in the coalition talks during the first half of November have unnerved consumers once again and, following the overall positive development in the previous month, led to a slight downturn in sentiment," market research group Gesellschaft für Konsumforschung (GfK) said in a statement.

"Primarily, proposals for a sharp increase in value-added tax have contributed" to this uncertainty, it added.

Collective depression

Consumers have become noticeably more skeptical, both about the overall economic outlook and their own financial prospects, GfK said. After three consecutive months of increasing optimism, expectations deteriorated sharply by 10 points in November, pushing the economic outlook indicator back into negative figures at minus 8.6. After an 8-point drop, income expectations landed at minus 12.9.

Only the consumer propensity to spend has improved by 2.1 points -- currently at minus 8.1 -- as Germans were ready to buy big-ticket items ahead of the holiday season and the expected rise in VAT, which many people believe would come before January 2007.

For its monthly poll, GfK surveys around 2,000 consumers on their views on the economic outlook, income expectations and their propensity to buy. The positive and negative responses are then used to calculate an overall consumer climate index.

The GfK index components are constructed in such a way that the zero-point value corresponds to the long-term average value since 1980. GfK forecast that indicator would slip to 3.1 points in December from 3.3 points in November, which is a steeper fall than has been expected by economists.

All quiet on the western front

The breakdown of the poll results has shown, however, that the current negative trends in Germany are largely due to the dampened mood in the western parts of the country. In the country's eastern states, the mood has actually improved.

Despite the dramatic labor situation and the unemployment rate of 18 percent which is twice as high as in the western states, eastern Germans seem to be more confident about their purchasing power.

"It seems that the prospect of a grand-coalition government has had an altogether different effect on consumers in the west, than it did in the east," GfK concluded.

When compared with the consumer index for the previous month, indicators of economic outlook in eastern German states rose by 2.7 points, income expectations by 4.5 and purchasing tendency by 9.3. At the same time, western Germans' confidence in the overall economic outlook fell by 13.4 points, income expectations fell by 11.1 points, while the purchasing tendencies remained unchanged.

Not so frustrated, after all

The results come as a surprise especially when viewed in the larger context of the east-west economic and political divide in Germany. During the election campaign in September, Bavarian Prime Minister Edmund Stoiber of the conservative Christian Democratic Union (CDU) branded eastern Germans as "frustrated" and pledged not to allow the eastern states to determine the country's fate. His statements, which provoked an outcry in the east, did nothing to improve the chances of a clear win for the conservatives.

The GfK survey was conducted before the conservative Christian Democrats (CDU) and CSU finalized a coalition deal with the Social Democrats (SPD) on Nov. 18 and before Angela Merkel was sworn in as Germany's first female chancellor on Nov. 22.