German Confidence to Fall; Economic Expectations Already Have Plunged

The German consumer climate reading has fallen for the second consecutive month, according to the GfK survey. The survey looks ahead to October and registers an 8.3 reading for climate, down from 8.6 in September. At this level, German climate stands in the top 12% of its historic queue. This compares to Italy and France, whose confidence indicators sit in the 66th percentile and the 36th percentile, respectively. Italy is barely in the top one third of its distribution and France is barely out of the bottom one third of its distribution. The U.K. which is a member of the European Union has confidence still in the 97th percentile of its historic queue.

German confidence is still doing much better than most other EMU nations. However, when looking at the survey components, we see some sharp deterioration in expectations. These component readings lag by one month. We have readings for September for economic expectations, income expectations, and propensity to buy. Economic expectations fell in September to 4.4 from 10.4 in August, but August saw expectations fall from the level of 45.9 in July, a dramatic falloff on economic expectations. That expectations reading now sits in the 48th percentile of its historic queue, below its midpoint. Income expectations fell in September to 43.4 from 50.1 in August; they had been 54.7 in July. The series still sits in the 91st percentile of its historic queue, a relatively elevated position. The propensity to buy reading slipped to 42.5 September from 49.3 in August. This reading sits in the 83rd percentile of its historic queue.

German climate remains elevated and has fallen only a slight bit from its recent peak. However, on the expectations front, economic expectations have fallen dramatically. Income expectations are beginning to erode. The drop in economic expectations a month ago was the largest drop on record for the survey (back to 2003).

Today, the chief executive of the Italian bank UniCredit was quoted as saying that the sanctions put in place in the Ukraine crisis have caused more problems for Europe than for Russia.

There are stories of concerns about energy in Europe. Gas deliveries are short to a number of European countries. Ukraine claims that Russia's plan is to freeze it out. One story has Hungary diverting gas from Ukraine for its own domestic use without any explanation why that's the case. There are no explanations for gas delivery shortfalls to other European countries either.

We can suspect that there may be an every-man-for-himself attitude here, with concerns that gas supplies will not be plentiful, countries that sit on pipeline junctions may choose to redirect flows for their own benefit. We don't know if that is going on. But we do know there's a considerable degree of chaos and widespread shortfalls in gas deliveries compared schedules.

Meanwhile, in Russia there is a new asset grab from the latest oligarch to fall into disfavor. Russia seems to be relying on strong-arm politics as much as ever. Prospects for a stable situation in Ukraine seem poor. If that judgment is correct, Europe will continue to suffer from that political instability.