German GfK Consumer Climate & Inflation Potential

Tomorrow, GfK announces the results of their monthly consumer sentiment survey.

Consumer demand is probably the most leading indicator in terms of what we can expect from the recovery, and how the markets will react.

Since the beginning of the year, markets have been in the process of rebalancing. But, recently, there has been a shift in underlying dynamics. And that can partially be explained by consumer data.

We all know at this point that investors have concerns about the potential for inflation.

It’s that worry that pushed up bond yields, pulled down tech stocks, and changed the dynamics in the forex market. But, as covid cases surged across Europe, the rise in bond yield – which reflects inflation concerns – slowed significantly.

Is there really pent-up demand?

The underlying issue is the expectation that consumers will come rushing back to the market once restrictions have been lifted.

However, we haven’t really seen significant improvements in consumer demand across Europe haven’t in the times when lockdowns were lifted. The second factor is that health and safety requirements make doing business more expensive.

PPE is not free, increased sanitation protocols cost money, and occasionally, delays. So, even if the economy goes back to exactly what it was pre-covid, there would still be inflation as businesses cope with increased operating costs.

However, that increase would likely be transitory as central banks hope, since once the cost of PPE has been internalized, it shouldn’t keep rising.

Where we get our goods

The third factor is supply chain disruption, which we are still seeing today.

The most notable example of this is probably the lack of microchip processors which have led to many car manufacturing plants shutting down. Those microchips are generic, and are used across a wide range of applications.

The pandemic has caused a series of logistic hurdles that are taking time to resolve, such as the increased costs of shipping simply due to a disruption in the flow of shipping containers.

Finally, the uneven distribution of the vaccine means that logistics and supply issues are likely to remain for at least several months.

Even if countries more advanced in their vaccination programs return economic activity to normal, they might see prices rise. This is because supply from countries still shut down due to lack of vaccinations might have more difficulties.

Motors manufactured in Germany might get exported to the US, for example. But there won’t be a return journey for the ship carrying jet engines if air travel is still on lockdown.

This increases the transportation costs since the transportation company can’t offset the cost of the return journey.

What we are looking for

Meanwhile, expectations for the consumer situation in Germany remain subdued. German consumer demand has not returned to positive since the start of the pandemic.

The consensus of expectations for tomorrow’s GfK survey is for -11.9 in comparison to -12.9 prior. A modest improvement, but still comparable to last May’s result.