Festive Boost to Economy

According to the financial institute's consumer index, German shoppers, inspired by the festive season's Yuletide consumerism, had given the economy a boost in the month leading up to Christmas.

The consumer index was recorded at 4.4 points in November, the fourth month of decline in a row, but December's showed a slight increase to 4.5 points.

The GfK claimed on the back of the results that "the consumer climate has stabilized as the year draws to a close" and that the December figures were the result of people getting out to do their Christmas shopping.

Economists have forecast for some time that dropping German unemployment rates would boost consumer spending, historically the weak link in the country's export-driven economy. The rate of employment growth has already begun to taper off, however.

Analysts credit other financial factors

"Household income and business cycle expectations are significantly down in the wake of slowing employment growth and inflation gaining speed but the willingness to buy is improving again," said Sylvain Broyer, an analyst at corporate and investment bankers Ixis-Cib. "This could be related to Christmas but is also a consequence of a fading impact of the VAT shock in spending habits."

An increase in value added tax (VAT) from 16 to 19 percent last January hit retail sales this year, notably for big-ticket items such as automobiles.

In 2008, lower German exports and corporate investment are expected to slow economic growth to 2.0 percent from an estimated 2.4 percent in 2007 owing to the euro's strength against the dollar, a weaker US economy, high prices for oil and other commodities and tighter credit conditions.

A spike in inflation caused by rising costs of energy and food products has also dampened consumer sentiment in the second half of 2007.

Institute looks forward to further boosts in 2008

Now however, GfK said "the current trend offers good opportunities for a boost in domestic demand in the coming year."

The institute welcomed a government decision to lower unemployment insurance charges, saying it "will not only impact positively on purchasing power but will also have a favorable effect on employment."

Broyer added that if the VAT shock faded, "consumer confidence could improve progressively next year."

Risks faced by the German economy, such as persistent inflation or continued turbulence on financial markets, could nonetheless quickly cause consumers to pull back and put more of their income into savings, GfK said.