German consumers fear worse times ahead (FT)

Why don’t Germans spend, borrow and consume like their US counterparts? Dawdle for an hour or so over coffee in the food court at the US Army’s Cambrai-Fritsch Kaserne in Darmstadt, southern Germany, and the conundrum transfixing Europe’s biggest economy becomes a little easier to understand.

“It is the American mindset – it is about more material things,” says a 32-year-old from New Jersey who works in administration at the base and gives her name as Holly. “Americans will gauge their success more on what they have at home, rather than how much they have in their bank account,” adds her friend Kari Gallagher, 28, from Michigan. “My German friends buy one good shirt, not five. They do worry about money more than we would.”

Their casual reflections on the relationship between shopping and the national psyche may contain more wisdom than they realise for policymakers grappling with Germans’ stubborn refusal to spend.

With business confidence at a 15-year high, according to last week’s closely watched Ifo institute survey, this reticence is frustrating politicians and central bankers alike. The European Central Bank argues that it has done all it can to boost growth by delivering low interest rates and low inflation. There are indeed signs that export growth is feeding through into domestic investment spending.

But how has the German consumer reacted? Retail sales fell unexpectedly by 2.7 per cent in March, according to data on Friday that pointed to only a modest bounce-back in consumer spending in the first quarter after the weak last few months of 2005.

Consumer confidence indices suggest morale is improving – but those are not necessarily good forward indicators of actual expenditure. And after four years of weak growth in, or even falling, consumer spending, the mood could hardly have worsened. Since the exceptional period immediately after unification in 1990, German consumer spending has never matched the pace in the US or UK.

“The darkest hours may be behind us,” says Dirk Schumacher, economist at Goldman Sachs in Frankfurt, “but it is too early to get excited about German consumption.”

The result is a lopsided German recovery. Even the most optimistic forecast sees overall economic growth rising scarcely above 2 per cent this year. The International Monetary Fund is predicting just 1.3 per cent: hardly what the US or the UK would call a boom. Worse, the Berlin government’s plans to raise value added tax by 3 percentage points next year will slam the brakes on consumer spending and gross domestic product growth in 2007 – although arguably some spending may be accelerated in anticipation of higher prices ahead.

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