Germany’s consumer climate still low, DAX eyes fifth straight drop

Germany’s consumer climate remains entrenched in pessimism, with the January GfK Consumer Confidence Index showing only a minimal improvement.

The leading indicator for private consumption in Europe’s largest economy edged up by 1.8 points to -21.3, recovering from December’s -23.1, the lowest reading since May.

While the figure came in slightly better than market expectations of -22.5, it remains deeply below pre-pandemic levels, highlighting the fragile state of consumer sentiment heading into 2025.

Germany’s consumer sentiment: Slight recovery, but long road ahead

The modest uptick was driven by gains in income expectations and a small increase in the willingness to buy. Income expectations rebounded by 4.9 points to 1.4 in December, following a sharp 17-point drop in November. Similarly, the willingness to buy improved by 0.6 points to -5.4, though it continues to hover at subdued levels.

Additionally, the willingness to save declined sharply, dropping six points to 5.9, reflecting reduced caution among consumers regarding their spending.

However, the overall sentiment remains precarious. “The consumer climate remains at a very low level”, cautioned Rolf Bürkl, a consumer expert at the Nürnberg Institute for Market Decisions.

“A sustained recovery in consumer sentiment is not yet in sight, as consumer uncertainty is still too high. The main reason is high food and energy prices. In addition, concerns about job security are growing in many sectors.”

Economic expectations for January remained stagnant, with the indicator reading 0.3, only marginally higher than December’s -3.6. Analysts echoed these concerns, pointing to broader macroeconomic challenges. 

Economic research institutions, including the ifo Institute, recently forecasted near-stagnant growth for 2025 after a slight contraction expected for 2024.

DAX falls, European equities slide after Fed’s hawkish pivot

The DAX index dropped 0.9% to around 20,000 points during Thursday morning trading, eyeing its fifth consecutive session of losses. 

Infineon AG led the decline, falling 3.5%, followed by Vonovia AG (-2.4%) and Continental AG (-2%). However, MTU Aero Engines AG and Rheinmetall AG managed to outperform, gaining 0.8% each.

European equities mirrored the DAX’s decline, weighed down by hawkish signals from the US Federal Reserve. 

The Euro STOXX 50 tumbled 1.1%, while France’s CAC 40 dropped 1.2%, Italy’s FTSE MIB declined 1.3%, and Spain’s IBEX 35 slid 1.6%.

Among Europe’s largest stocks, Dutch semiconductor giant ASML Holding was the worst performer, tumbling 3.9%. Banco Santander (-2.9%) and Vivendi (-2.7%) also ranked among the day’s notable laggards.

While the US central bank delivered a widely anticipated 25-basis-point rate cut, it raised inflation expectations for 2025 to 2.5% (from 2.1%) and signalled a slower pace of cuts. 

While the Fed delivered a widely expected 25-basis-point rate cut, it raised inflation expectations for 2025 to 2.5% (up from 2.1%) and indicated a significantly slower pace of rate cuts next year.

Fed Chair Jerome Powell emphasised the central bank was entering a “new phase” of monetary policy, with interest rates now approaching neutral territory. The Fed’s projections now anticipate only two rate cuts in 2025, down from four indicated in September and fewer than the three expected by markets heading into the meeting.

“The outlook for the Fed’s trajectory in 2025 remains vague. Consistent with our base case, a pause in January seems almost certain, but beyond that little is known”, said Rogier Quaedvlieg, economist at ABN Amro.

According to Chris Turner, economist at ING Group: “The Fed is going to be much more cautious next year with sticky inflation and President Trump’s policy mix meaning a higher hurdle is required to justify rate cuts in 2025.”

The Fed’s cautious tone has reignited concerns over restrictive monetary policy, fuelling investor risk aversion and putting further pressure on European equities, which are grappling with their own set of economic challenges, including sluggish growth and Trump-related tariff fears.