German Consumer Confidence Improves to Minus 26.6 as Economy Holds Up

German consumer confidence rose to minus 26.6 in its September forecast from minus 29.4 in August, beating the minus 29.2 consensus in a Wall Street Journal poll, as resilient economic growth lifted household expectations for a fourth consecutive month.

"Although the economic outlook in late summer is still more than six points below the corresponding level of the previous year, the fourth consecutive increase indicates a slight upward trend," said Rolf Buerkl, head of consumer climate at the Nuremberg Institute for Market Decisions.

The index was driven by economic expectations, which picked up for a fourth month, and income expectations that reached their highest level in six months. The German economy grew 0.3 percent in the second quarter, supported by stronger exports and better-than-expected retail trade, according to the statistics agency. Business sentiment also improved, with the Ifo index rising three times in a row between May and July and the Purchasing Managers' Index pointing to a slight expansion.

Still, consumer confidence remains below prewar levels, and elevated inflation continues to threaten household purchasing power. With eurozone inflation close to one percentage point above the European Central Bank's 2 percent target, the risk that businesses pass on price increases to consumers is growing. Economists at Santander expect inflation to rise to 3.4 percent in August and 3.5 percent in September, and remain above 3.5 percent until March next year.

The Bundesbank said last week that GDP is likely to expand only slightly, if at all, in the third quarter, tempering the improvement in sentiment. "The renewed rise in oil and gas prices, persistently elevated refining margins, the gradual withdrawal of government support and unfavorable base effects all point to sustained energy inflation pressures," the Santander economists said.

The component breakdown shows the recovery remains uneven. The willingness-to-buy gauge held at minus 9.8, little changed from minus 9.9 in July, while the willingness-to-save indicator eased to 15.5 from 17.0, a sign households are still cautious about discretionary spending even as their income outlook brightens. Uncertainty in the Middle East is expected to continue weighing on sentiment over the course of this year, keeping the recovery in consumer confidence shallow even as the economy shows resilience.

Inflation Path Keeps ECB on Alert

The inflation trajectory matters for the ECB's policy path. With headline inflation running near one percentage point above target and energy costs set to stay elevated through early 2027, the central bank faces pressure to keep monetary policy restrictive even as growth slows. The last time eurozone inflation exceeded 3.5 percent, in late 2023, the ECB held its deposit rate at a record high for several months before beginning to ease, a precedent suggesting policymakers may tolerate a prolonged period of above-target prices rather than risk a sharper slowdown.

For markets, the combination of a modestly improving consumer backdrop and sticky inflation creates a stagflationary tilt that could keep European equities range-bound and weigh on fixed income. If inflation prints above 3.5 percent into early next year as Santander projects, the ECB's September meeting becomes a live test of whether the central bank prioritizes price stability over growth support.

This article is for informational purposes only and does not constitute investment advice.