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Economy in Brief

German GfK Consumer Climate and Economic Expectations Remain Suppressed
by Robert Brusca  January 27, 2022

German consumer climate improved ever so slightly but held to the relatively deep negative read it acquired in January again in February. The climate reading gained to -6.7 from -6.9, but its rank standing as of February was still in the lower 4.2% of all climate readings historically.

The Omicron factor
These weak readings are substantially the result of the rapid spread and dread of the Omicron variant. Omicron, as transmissible as it is, has sent infections in Germany sky high- well above any past peak- but there are also a few days now of infections getting lower. More important is that the daily death chart which had picked up is already more than a week past its recent peak. And even more notable is the fact that, despite the great volume of infections, the peaking of the death chart has come at about half the value of the past peak; this is despite a state of infection that was worse than its past peak by a factor of more than five.

Denmark now declares that Omicron is no longer a threat to society (Source here). In Spain and Japan, politicians are calling for Covid-19 to be treated as something like influenza (same source). Yet, there are still places like China and Hong Kong that continue to implement a zero-tolerance policy. These sorts of differences are going to cause global growth to play out very differently in countries where Covid-19 is met with such disparate approaches.

Germany was hard hit by Covid at a time that the virus was still being evaded and feared by most people. There has been a considerable impact on the economy as we have seen in the German flash PMI data. This consumer survey suggests that consumers are still a bit back on their heels about the virus. While attitudes toward Omicron are changing, WHO continues with rather harsh rhetoric and warnings. Denmark's lead may still take quite some time for others to follow… if they do follow.

The GfK survey
The detailed components of the GfK index are available on a one-month lag. As of January, we see economic expectations are up over their December level but still below the November level and not even half of their level in October. Still, the economic expectations index sits in the 71.6 percentile of its historic range of values, a much stronger position than for climate overall in February. Income expectations are another component of detail that is available with a January value. It is up strongly month-to-month rising to a reading of 16.9 from December's 6.9. But at that level income expectations are still below their October reading of 23.3 and their queue standing is below its median at the 44.1 percentile mark. In terms of understanding queue or rank standings, the median observation occurs at the 50th percentile ranking. The final bit of detail is on the propensity to buy. That metric, in step with its fellow components, advanced in January, rising to 5.2 from December's 0.8. However, it remains well below its October level of 19.4 and its historic rank standing is only at the 28.4 percentile, well into the lower third of all its historic readings. That reading, of course, is well below its median as well.

On balance, the German report shows that climate is on the mend- but it is a very slow mend from a very weak spot. The current state of climate is simply historically very poor, and Germany certainly has the virus to blame for that. That dependency makes it hard to look into the future with much clarity even though there are clear signs of the virus abating at a rapid pace. We just can't be too sure how quickly people will lose their fear of it and return to life, business, and recreation the same as before the virus struck. And in any event, there are sure to be lasting scars and changes in behavior. The good news is that economic expectations are relatively upbeat and at an historically firm level. Income expectations are making some gains but are still lethargic and below average. The propensity to buy shows the weakest gain in January and it still lags other earlier months and clings to a weak overall reading. The consumer's mood will have to be further repaired.

More to worry about
In addition to the virus, Germans also have Ukraine situation to distract them from getting back to normal. They do have a lot to get over to put their economy back on track and with so much trade with China, a country still seeking zero Covid infection, Germany may find its sales and supply chain issues are harder to put right.

Elsewhere in Europe
There are January peeks into confidence for France and the U.K. while Italy offers up a number for December. Lagging the German reading by one-month, French confidence dipped to 98.8 in January from 99.6 in December while the U.K. suffers a four-point reversal of fortune. French confidence has been steady, with the slightest of updrifts for the past four months. The U.K. has been stuck in a weak patch of data that has just gotten weaker this month and has fallen to lowest reading since February 2021. Italy demonstrates confidence data only as up-to-date as December. And since Germany experienced quite a set-back in January, it may not be a good idea to compare Italy with the others.

But setting momentum aside, the Italian ranking for confidence is much higher than anywhere else in recent months at a queue or rank standing of 98.7%. It compares to a French reading at 68.2% and a U.K. reading at 28% and of course to a German ranking at 4.2%. As an economy, Italy does not seem to be functioning any better than the rest of Europe; however, as a people, the Italians have had their confidence dented by much less.

Summing up
From the virus to geopolitical uncertainties, Europe has a basketful of things to worry about. The recovery from the virus is ongoing and while the unwinding appears to be as fast as the infection process. It is the impact on consumer psyche that we should worry most about. It does appear that Covid is medically less of an issue than it was but far of what it did, and can do, is deeply imbedded in society.

At first, the high transmissibility of Omicron seemed to be a huge setback to growth prospects. But as the lesser virulence has been demonstrated and come to be understood, some now look at Omicron as the variant that will take Covid off the list of being public enemy number one. Of course, as WHO, points out, Omicron is still a killer. And because it infects people in so much greater numbers and so quickly, an Omicron infection can overwhelm a local community and its medical capabilities. But once Omicron is past its peak and begins to unwind, it becomes much less threatening. We will want to watch that process to be sure that new variants do not arise to undo this new less worrisome setting. We must watch to see how people react as normalcy and however, much of it, we can get restarted tries to reassert itself.

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