Germans show reluctance in increasing spending though inflation decreases
Germany, once the powerhouse of the eurozone, is struggling to revive its economy due to hesitant consumers. Despite low interest rates and stabilized prices, households are increasing their savings rates and holding back on spending.
Lingering economic uncertainties from past inflation shocks, persistent inflation expectations, and concerns over external factors like US tariffs are the main reasons for this cautious behaviour. According to Matthias Diermeier from the IW economic research institute, it can take one to five years for consumer perception to align with reality.
The memories of the 2022 inflation shock remain vivid, reinforcing cautious behaviour. Over 50% of consumers expect energy and tariff costs to rise further, which directly suppresses spending on non-essential goods. Despite four consecutive months of improving income expectations, willingness to spend, especially on discretionary items like luxury fashion and furniture, remains muted.
Nearly half of German consumers feel their incomes are insufficient to cover basic needs without compromise, resulting in frustration and restrained discretionary spending. At the same time, Germans prioritise savings and value-seeking over indulgence.
The gap between estimated and actual inflation is more pronounced among supporters of radical parties like the AfD and BSW. Inflation rates remain around 20 percent over 2020 levels. Consumers complain about elevated costs of electricity, groceries, and leisure activities.
Germans, with a deep aversion to rising prices due to historical experience, including a bout of destabilizing hyperinflation in the 1920s, are particularly sensitive to price increases. This is evident in the case of Tim Scheider, a chemistry student who had to forgo attending his favourite music festival due to increased ticket prices, and Alkim, a Turkish aeronautics student, who has had to cut back on his diving hobby and buy the cheapest pasta due to rising prices.
The cost of a three-day music festival pass has more than doubled from the 2019 price. Persistent inflation has fueled calls for an "ice cream price cap" in Berlin, limiting the cost of a scoop to 50 cents.
Despite these challenges, consumer sentiment remains extremely low due to concerns over US President Donald Trump's trade policy and the weak domestic economy in recession for the past two years. A recent survey showed German consumers fear rising prices more than a war between the West and Russia.
According to a regular survey published in May, saving rates are on the increase. German retail sales have decreased in May, April, and March, according to official statistics. Inflation in Europe's biggest economy has fluctuated between 1.6 and 2.6 percent over the past year.
In sum, the key reasons for consumer hesitancy in Germany are resilient inflation concerns and energy cost anxiety, pervasive economic pessimism and low consumer confidence scores, the lingering impact of the 2022 inflation shock creating cautious behavior, income inadequacy perceived by nearly half of consumers, leading to budget constraints, cultural preference for saving and financial prudence reinforced by geopolitical and tariff-related uncertainties, and a shift toward mindful, value-conscious consumption rather than discretionary spending.
Personal finance concerns, driven by lingering inflation fears and energy cost anxiety, are significantly impacting business spending and consumer behavior in Germany. The cultural preference for savings and financial prudence, exacerbated by economic pessimism and low consumer confidence, has led to an increase in personal savings rates and a decrease in retail sales. The memories of the 2022 inflation shock and the ongoing inflation rates, which are around 20 percent over 2020 levels, have made Germans particularly cautious about their personal finances.
