Morale among German consumers rose to its highest level in almost six years heading into July thanks to a robust labor market and strong wage hikes, adding to signs that Europe's largest economy is slowly recovering after a weak start to 2013.
GfK market research group said on Wednesday its forward-looking consumer sentiment indicator, based on a survey of around 2,000 Germans, climbed to 6.8 going into July - its highest level since September 2007 - from 6.5 in June.
That was well above the consensus forecast in a Reuters poll of economists for a reading of 6.5 and beat even the highest estimate for a reading of 6.7.
The improvement will be welcome news for the government, which is relying on domestic demand to prop up growth this year as foreign trade, the economy's traditional growth driver, suffers from the euro zone crisis and a slowdown in China.
It should also offer some hope to struggling euro zone states which are seeking to offload more of their goods on wealthy Germans as they seek to rebalance trade with Germany.
"Optimism appears to be unbroken," said Rolf Buerkl, a researcher for Nuremberg-based GfK.
"The income outlook of Germans has improved further from an already high level on account of the stable employment situation and good collective bargaining agreements, which have also benefited economic expectations," he added.
German workers have secured hefty wage hikes of up to 6.6 percent this year. That, combined with moderate inflation, has boosted shoppers' purchasing power at a time when the paltry interest rates being offered by banks give no incentive to save.
CONSUMER SPENDING
The survey nonetheless showed Germans' willingness to buy dipped in June, though GfK stressed that it remained at a high level overall.
GfK said the stable labor market and strong wage deals were giving Germans the planning security they needed to splash out on big-ticket items like property, especially because they were currently able to take out loans and mortgages on good terms.
Household spending was the German economy's saving grace in the first three months of this year, managing to bring Europe's growth engine back from the brink of recession after it shrunk in late 2012 due to weak investments and slow foreign trade.
GfK reiterated its prediction that private consumption, which makes up nearly 60 percent of German gross domestic product (GDP), would rise by about 1 percent in real terms this year as long as the euro zone crisis does not worsen.
For a third straight month Germans expected their incomes to rise as the unemployment rate remains near a post-reunification low in stark contrast to euro zone peers like Greece and Spain where around one in four are out of work.
Consumers also expected their economy to slowly regain momentum, though a sluggish global economy and the lingering recession in many euro zone states is seen stopping it from recovering faster.
Other recent data has pointed to the German economy is gradually regaining traction, with business and investor sentiment improving, foreign trade and output increasing and the private sector expanding slightly, though industrial orders have slumped and unemployment has edged up.
The economy has not become a major election issue ahead of a national vote on September 22 and is unlikely to if consumer morale remains strong so the GfK survey bodes well for German Chancellor Angela Merkel as she seeks a third term in office.
Data due out later this week is expected to show retail sales increased slightly on the month in May.
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