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Frothy milk prices, subprime fears and weaker job prospects have undercut consumption pillars of the German and US economies, studies on both sides of the Atlantic show.

September 27, 2007 By William Ickes Berlin – Frothy milk prices, subprime fears and weaker job prospects have undercut consumption pillars of the German and US economies, studies on both sides of the Atlantic show. The first two factors sapped shopper morale in the euro zone’s biggest economy this month, according to a survey released yesterday by the German GfK institute. In the US, meanwhile, consumer confidence tanked this month to almost a two-year low because of faltering business and job market conditions, said the Conference Board, the US business research group. Household consumption is a stronger contributor to the world’s biggest economy than in Germany, where exports are an engine of growth. The leading barometer of German household confidence fell to an indexed 6.8 points from a revised level of 7.4 points last month, its second drop in as many months, said the GfK. “Above all, the credit crisis in the US and rising food prices are responsible for German consumers’ decreased inclination to break out their debit cards,” said the institute. “The German propensity to buy is currently restrained. This accompanies the propensity to save, which has increased considerably this month.” The collapse of the US subprime market triggered a crisis in the global banking system that tightened credit and caused many businesses and consumers to cut back on spending plans. Other factors cited in the GfK study were debates about the euro’s current strength to the dollar and its potential effect on the German economy. Soaring oil prices and their likely effects on heating bills, and the prospects of an overall economic slump in the US, a key market for German exporters, added to the “rather more gloomy conditions of late”. In the US, “weaker business conditions combined with a less favourable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern”, said Lynn Franco, the Conference Board’s research director. The group said its US consumer confidence index fell to 99.8, down from a revised 105.6 last month. Ixis Corporate and Investment Bank economist Marie-Pierre Ripert identified “weakening in the job market, tightening in credit conditions and the financial crisis, declining home prices and rising [petrol] prices” as major causes. “All these factors are likely to weigh on consumer spending in the months ahead, triggering a significant deceleration in gross domestic product growth,” said Ripert. The US report was based on a survey of 5 000 households, while the GfK study polled 2 000 people on their expectations for the month to come concerning the country’s economy, personal income and their inclination to make purchases. German consumer confidence dipped in all three domains. While consumers continued to believe the German economy was healthy, they paid close attention to developments in the US and “continual speculation as to the impact of the mortgage crisis is making its mark on consumer sentiment”, said GfK. Increased disposable income that resulted from lower unemployment and higher wages failed to stem a lowering of income expectations to a level near that in February. German shoppers, however, “appear to have already taken into account” the euro’s rise in value and the German research group did not expect it to result in “further significant setbacks”. The euro, meanwhile, set another record high to the dollar, reaching $1.4162 in early trade in Tokyo yesterday on growing concerns that the US economy was losing steam. – AFP