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VAT cut ensures a shopping mood – consumer climate increases

The first figures indicate that the lower value added tax is driving Germans to the shops: the consumer climate improved significantly in July. It remains to be seen whether the short-term effect will last.

In the opinion of the consumer researchers of the Nuremberg-based company GfK, the lowering of the value added tax will result in significant purchase incentives. “The propensity to buy has risen sharply,” said GfK consumer researcher Rolf Bürkl at the launch of the consumer climate study for July. Consumers apparently intend to move ahead with planned major purchases, which will help consumption this year, “said Bürkl.

However, he warned of a VAT bubble. In the run-up to past tax increases, for example from 2006 to 2007, there were significant pull-forward effects.

“Retailers and manufacturers must be prepared for the propensity to consume to decrease again if the original VAT rate applies from January 2021,” said the expert. But even if the effects are not sustainable – the tax reduction is an important pillar for domestic demand in the current year.

Buying mood rises surprisingly quickly

Regardless of tax effects, the consumer climate is clearly and surprisingly steep again – which indicates a V-shaped recovery in consumption. “Regardless of the VAT increase, we work our way out of the basement,” said Bürkl.

The consumer climate has risen by 23 points since the low point in the spring. The forecast was minus 0.3 after minus 9.4 in the previous month. The longer-term average is around plus 10.

Germans’ income expectations also appear to be improving again – even if expectations are still significantly lower than in the previous year. According to GfK, this also has to do with the expected payment of a children’s bonus.

Is there a second corona wave?

Overall, state aid would have an enormous cushioning effect. Bürkl also saw the recently reached compromise at EU level as a strong sign that the public sector is ready to help.

Despite the partly clear recovery, the worst recession in German post-war history continues to pose major concerns: The questions of whether a second wave of infection are imminent, whether there will be an increased number of bankruptcies and how the situation on the labor market will develop, are not conclusive answered.

The results are an extract from the “GfK consumer climate MAXX” study and are based on around 2,000 consumer interviews per month, which are carried out on behalf of the EU Commission. The consumer climate relates to total private consumer spending.

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