Slight Climate Backtrack in Germany; Confidence and Money Growth Remain Weak in Europe

The GfK measure of consumer climate in Germany slipped in July, falling to -25.4 from -24.4 in June. Climate had been improving tracking back to a cycle low in October 2022; from that point onward confidence/climate been steadily, at least in a small way, persistent in improving monthly climate until this month. The climate reading for Germany remains extremely weak with a queue percentile standing (or count percentile standing) in the lower 5% of its historic range of values.

The components for GfK climate lag the headline by a month. Economic climate in June stepped back from a 12.3 reading in May to a 3.7 reading in June. This is the weakest reading since January 2023.

The income reading weakened to -10.6 in June from -8.2 in May, although it was last slightly weaker in April 2023. This was not as sizeable a step back for income expectations as it was for economic expectations.

The propensity to buy, in contrast, improved slightly to -14.6 in June from -16.1 in May. And this measure is stronger than most readings since August 2022, although it was slightly weaker than the reading in April 2023. The propensity to buy has been stuck and a range around -13 to -15 for quite some time. The reading slipped to net negative numbers back in February 2022 and has remained negative ever since.

Other European confidence measures The table also offers consumer or household confidence readings for Italy, France, and the United Kingdom. All three of these countries showed some degree of improvement in confidence in June compared to May, where June is the most up-to-date estimate now available. The estimate for Italy has a standing at its 75.9 percentile France is much weaker at a 14-percentile standing and the U.K. is closer to the French standing at a 26.7 percentile standing. Consumer confidence in Italy has been more robust than France and the U.K. on a ranking basis for some time.

Consumer confidence readings have been improving at a steady-to-slow pace for some time. The German reading for May marks a step back from a formerly improving trend. Inflation adjusted money supply data (below) show an ongoing and more or less steady rate of money and credit deterioration over the last several years. Real private credit in the EMU has been falling at a rate of 2% to 3.6% over the past 12 months. Real money supply is contracting at a 5.1% to 4.4% pace. In the U.K., the pace of decline is sharper and has been deteriorating as well. In the U.S., real money growth has been declining at a steady pace over the last year. Japan shows weak real money growth that has been flirting with contraction over the past 12 months.

On balance, money growth conditions remain restrictive. Central banks are hiking rates, except in Japan. Consumer confidence is weak in Europe except in Italy.

Central bankers... Central bankers in Sintra Portugal today were touting their policies and not sounding like there is any change afoot. Inflation is too high and central bankers seem to be convinced that their slow, steady-as-she-goes programs of hiking rates are the best way to deal with it. The bottom line here clearly is that inflation will be higher longer. Central banks are not moving aggressively to restore inflation to target. They are handling economic repercussions with kid gloves; this is possibly because they realize that governments expended so many resources during Covid that procyclical recovery policies would be hampered if a significant recession were to emerge. In any event, it is clear that these central bankers are cut from a different cloth than those who came before. The historic record is that central bankers have been more prone to act with too little vigor than with too much. It is reasonable to wonder if these policies are optimal or if central bankers are being too lax, once again by not mopping up their own mess fast enough.