FLGR - Can German Consumer Savings Raise Domestic Growth?
Summary
- Cash is king in Germany. With inflation running high, we look at the German consumer’s ability to increase spending, save less and support domestic growth.
- Germans are pessimistic about the future. The KfW consumer confidence survey is just starting to recover from its all-time lows.
- A recent survey by the German savings bank union revealed that, with headline Inflation running at 7.5% annual or higher, 60% of German households must use their entire disposable income to sustain their spending habits.
By Maximilian Korell
Cash is king in Germany. With inflation running high, we look at the German consumer’s ability to increase spending, save less and support domestic growth.
Germans are pessimistic about the future. The KfW consumer confidence survey is just starting to recover from its all-time lows. Granted, the past year was not exactly filled with good news for the German and European consumer. While retail energy prices are in descent and government subsidies are kicking in, we see a rebound in consumer sentiment from these all-time lows. However, with interest rates on the rise, how far can sentiment improve, and will it result in more spending?
There’s nothing better to illustrate the desire for financial safety than the use of excess money. Consider the savings quota in Germany. Over the past 20 years, it has run at around 11% per annum, increasing to almost 16% since the start of the pandemic in 2020. Then there is savings behavior. The most popular savings channel in Germany is the checking account. According to German authorities, roughly two trillion euros are stashed in this “Sparstrumpf” (in English, money sock). Higher-yielding investments such as equities and fund investments only amount to roughly half of that amount. As cash returns are consistently below inflation, German consumers happily pay a negative real return for the feeling of protection.
Considering the above, from a consumer spending standpoint, spending should only increase under two scenarios: Either the immediate need for holding a perceived safe asset is decreased—an end to the war in Ukraine would be a good starting point, among energy headlines and inflation pressures—or the consumer is forced to spend more and save less due to inflationary pressures. In the current environment, it is the latter that, for now, makes Germans spend more and decrease the savings ratio. However, this additional spending will likely only apply to core goods and services that need to be consumed rather than increase spending on luxury goods or leisure activities.
A recent survey by the German savings bank union revealed that, with headline Inflation running at 7.5% annual or higher, 60% of German households must use their entire disposable income to sustain their spending habits. This will support retail sales numbers for as long as the labor market and wage increases allow. However, a notable drawdown from savings into spending will likely only occur when the major issues facing Germany, Europe and the world are resolved. As a result, we doubt that consumer spending will have a material impact on German GDP in the immediate future.
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Can German Consumer Savings Raise Domestic Growth?