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German consumer confidence to rise in July

FRANKFURT (MarketWatch) -- German consumer sentiment is set to improve in July from an already elevated level, suggesting household spending will continue to spur growth in Europe's largest economy, data from German market research group GfK showed Tuesday.

The increase -- which comes on the back of rising employment and wages in Germany's surprisingly robust labor market -- defied forecasts for a slight deterioration.

GfK's forward-looking consumer climate index for July rose to 5.8 points, up from 5.7 points in June. Economists polled by Dow Jones Newswires had expected a fall to 5.6 points.

GfK warned the longer-term outlook isn't so rosy, though. Germany cannot escape the negative impact of external risks such as the raging euro-zone debt crisis and the region's economic downturn, it said.

"Growing uncertainty due to the escalating [euro-zone debt] crisis, intense debate of a possible Greek exit from the single currency, and the crisis in the Spanish banking sector could in time also have a greater impact on German consumers," GfK said.

If confidence drops, spending will fall with it, the polling firm said.

German business sentiment has already worsened significantly. The closely watched Ifo index fell to 105.3 points in June from 106.9 points in May, as manufacturers were hit by a wave of uncertainty over the euro zone's prospects.

The ZEW institute last week reported that economic expectations among financial-market analysts and investors suffered the biggest drop in almost 14 years.

"Evidently, there's growing concern that Germany could also be drawn into the escalating downward trend," GfK said.

While GfK's overall consumer climate index refers to the following month, its sub-indexes -- economic expectations, income expectations and buying propensity -- refer to the current month.

Following three months of steady increases, German consumers' expectations for economic developments worsened sharply in June to a level last seen in December last year, when the German economy was shrinking.

The economic expectations index dived to 3 points in June from 19.6 in May.

Germans regard the external risks as being a threat to the economy in general, rather than to their personal financial conditions, GfK said. The income expectations sub-index rose sharply in June, to 40.1 points from 32.0 points in May.

German consumers also expect their income to grow thanks to rising employment, recent wage agreements that will ensure salary increases, and abating inflation pressures.

Supported by strong income expectations, the "propensity to buy" index rose slightly, to 32.7 points in June from an already high level of 32 in May. As consumers continue to distrust financial markets and interest rates are at historic lows, they tend to prefer putting their money into big-ticket purchases, GfK said. Generally, real estate and consumer durables qualify as big-ticket items.

GfK maintained the forecast it made at the start of the year that German private consumption will rise by about 1% this year in inflation-adjusted terms.

The German central bank, the Bundesbank, expects the economy as a whole to grow 1% this year.