German consumers hit the ‘sweet spot’

It is a Monday morning in mid-September, the summer holidays are past and everyone is supposed to be back at work. Yet the giant car park at Höffner, a big furniture retailer in southern Berlin, is full to capacity.

“It’s amazing,” said Gerd Schumacher, here with his wife to buy a sofa. “It’s like everyone just wants to get rid of their money.”

Germans have a well-earned reputation for thrift. But in the past year or so they have turned into uncharacteristically big spenders, urged on by a combination of record high employment, rising wages, low inflation and near-zero interest rates.

“Consumers are in an absolute sweet spot,” said Stefan Schneider, head of strategic research at Deutsche Bank.

After years of near-stagnation, private consumption is growing at about 2 per cent — a rate Germany has not seen since the dotcom boom of the late 1990s.

For economists, the shift is significant. Germany has long relied on exports, which make up almost 40 per cent of GDP, to drive growth. The wage restraint showed by German workers helped underpin that by maintaining competitiveness. But it also came at a price — low income growth and sluggish domestic demand, one of the reasons why Germany’s current account surplus is so big.

There are signs that model could be changing. The slowdown in emerging markets has tamed demand for German exports. As a result, companies are investing less but German domestic demand is kicking in and taking up the slack, creating a more balanced economy.

“The [economic] upswing we’re seeing now is consumption-driven,” said Jörg Krämer, chief economist at Commerzbank. “It’s a paradigm shift in the German growth model.”

Whether that will have consequences for the rest of Europe is unclear. For years, economists have said that Germans could help the whole eurozone economy by spending more and saving less. But so far, saving rates have remained doggedly high, at about 10 per cent. Meanwhile, the budgets of the government, private households and the corporate sector remain in surplus.

“Germans are not exactly digging into their savings and going on a spending spree,” said Mr Schneider.

But the fact is, Germans do feel a little bit richer — and are spending accordingly. Real disposable income grew 2.4 per cent last year, partly driven by a rise in employment. Some 43.6m people were in work in July, the highest number since German reunification 26 years ago, and the unemployment rate is just 6.1 per cent.

A long period of belt-tightening has also come to an end. In the 2000s, Germany undertook a sweeping reform of its labour market and welfare system, known as Agenda 2010. While the changes were often credited with improving the country’s economic performance, there was plenty of short-term pain, in the form of higher unemployment and cuts to out-of-work benefits. Meanwhile, during and after the 2008 financial crisis, unions agreed to a policy of wage restraint to prevent mass lay-offs.

That has been cast aside, and wages rose 2.4 per cent last year. That growth, combined with low inflation, is a “dream scenario for consumption”, said Mr Schneider.

A key barometer of German consumer confidence run by pollster GfK, which has been drifting upwards in recent months, highlights the shift in sentiment. “People feel their jobs are safe — the fear of unemployment has gone,” said Rolf Bürkl, GfK’s expert on consumption. “As a result they’re confident about making big purchases and taking on debt.”

In the car market, 245,100 new vehicles were registered last month — 8 per cent more than a year before. Credit is also booming: in the first half of 2016, banks handed out €27.7bn in consumer finance loans, a 13 per cent increase year on year, according to industry data.

Retailer Ikea provides a snapshot of the buoyant mood. It says its German business saw record revenue growth through August this year, driven by purchases of big-ticket items such as kitchens and bathrooms. The company is planning to open its 51st store in Germany, its biggest market, this month, and three more next year.

Ulrike Kastens, an economist at Sal. Oppenheim, notes the rising “propensity to buy” in GfK’s consumer confidence barometer. “It’s very high at the moment,” she said. “It’s the low-interest environment that is encouraging people to buy consumer durables — furniture, washing machines and so on.”

Low interest rates have badly hurt German savers and stoked anger at the European Central Bank’s policy of easy money. But the consumption data — and the testimony of Höffner shoppers such as Mr Schumacher — suggest they have a positive flipside.

“Low interest rates definitely spur you on,” he said. “These days, there’s not much point in leaving your money in a bank.”