After a brief surge last month, consumer confidence in Germany took a sharp downturn in the outlook for September, dampened by declining income expectations and a slight rise in the propensity to save. The consumer climate index dropped by 3.4 points, indicating a pervasive sense of economic pessimism. The conclusion of the UEFA European Championship seems to have ended the temporary uplift in sentiment, leaving behind worries about job security and an uncertain economic outlook.

Income expectations saw a steep decline, plummeting by 16.2 points to a meager 3.5, signalling growing financial concerns among households. This drop mirrors the anxieties last seen two years ago when inflation eroded purchasing power. Coupled with a minor increase in unemployment and company insolvencies, consumers are now more cautious, evident in the slight decrease in their propensity to buy.

Economic expectations have been volatile, swinging downwards this month after previous gains, further weakening the RPI and RPI-P to minus 22 and minus 29. With the prospect of a weakened economy and rising recession fears, hopes for a steady recovery seem distant. As job security worries mount, German consumers are likely to remain wary, further stalling economic momentum.

After August's much better-than-expected 2.2-point improvement to minus 18.4, the consumer climate index in September is expected to improve further to minus 17.9.

GfK's consumer climate survey asks around 2,000 German consumers every month about their assessment of economic conditions. The questions focus on economic and income expectations and consumers' willingness to buy. Having calculated the differences between the positive and negative responses for each question the results are synthesized into a single number that reflects overall consumer expectations for the coming month.

Any insight into household expenditure is vital to understanding how the economy as a whole is shaping up. The monthly correlation between the GfK consumer gauge and actual spending is not especially high but trends in the index can offer useful information about potential underlying developments in consumer behavior. As a forward looking indicator, the GfK index is one input used by analysts in the construction of their forecasts of future German retail sales.