As economy stalls, Germany struggles to get consumers spending

By Maria Martinez

BERLIN (Reuters) - With global trade deeply uncertain and a tariff war causing havoc on financial markets, Germany's next government is hoping to unleash domestic consumption to revive stalled growth in an economy that has been driven for decades by exports.

Conservative chancellor-in-waiting Friedrich Merz, in a newly forged coalition with the centre left Social Democrats (SPD), has announced policies such as tax cuts and raising the minimum wage.

He hopes these measures will increase purchasing power and support domestic demand. However, economists, retail groups and consumer behaviour experts question whether they will be enough to persuade Germans - already among the world's biggest savers - to break open their piggy banks and spend.  

"I doubt that we will really see a sharp consumption revival this year," Carsten Brzeski, global head of macro told Reuters.

Germany's attempts to wean itself off its exports dependency predate the trade turmoil unleashed by the Trump administration, as it has long struggled to deal with declining competitiveness.

Since 2023, domestic consumption has been stagnant however, with the household savings rate reaching 20% last year due to political uncertainty, above the EU average of 15%. 

To avoid a third year of contraction in 2025, economists agree that boosting consumption in Europe's biggest economy is crucial.

"Looking at it in a very simple way you can say, okay, there is a fall in demand for our export goods, so we have to strive for more domestic demand, which is investment and consumption," Cyrus de la Rubia, chief economist at Hamburg Commercial Bank AG, told Reuters. 

Merz's coalition has agreed to lower income taxes for middle and lower income households, which could help consumption, the German retail association HDE told Reuters. "However, we do not expect a significant upturn." 

The government will make overtime pay tax-free and offer tax benefits for those working beyond retirement age. The minimum wage is expected to rise to 15 euros ($17.10) per hour and the value-added tax (VAT) on food in restaurants will be lowered to 7% from a current 19%. 

Deutsche Bank, however, said these "miscellaneous fiscal gifts" will provide only limited relief in the near term.    

Since unveiling the measures, Merz's coalition has started bickering about the contents of the agreement, with Merz warning that tax cuts would only happen if there was enough money in the budget. 

Moreover, the measures would likely take time to change household habits, Salomon Fiedler, an economist at Berenberg, told Reuters.

"German consumers seem to need a more psychological kickstarter: a policy or political breakthrough," Brzeski said.

Despite a borrowing bonanza announced by Merz after the election, consumer sentiment was broadly unchanged afterwards, with a cooling labour market also making households hold back. 

SUSTAINABILITY TRENDS

Adding to their reluctance to spend, German consumers are increasingly conscious of their environmental impact. 

In the heart of Berlin is Kleiderei, a labyrinth of aisles with clothing from virtually every decade and style imaginable that customers can borrow for a monthly fee, like "a clothing library." 

"Our model is about slowing down consumption and creating a real community," Kleiderei director Lena Schroeder told Reuters, having now five physical stores in Germany. "When customers visit our stores, they can touch and feel the clothes, making more conscious decisions about what they borrow."

Kleiderei only includes pre-owned clothes in its collection of 60,000 pieces, repairing them to maintain quality. 

As fast fashion brands like Shein and Temu rise, social media influencers advocate more environmentally responsible consumption.     

"These advertisements on TV or radio always want people to buy more... but we actually don't need it," said Lisa Monaco, founder of the blog Nachhaltig4Future. "We already have an excess of everything - it's not good for anyone."

The 34-year-old, who started her sustainability platform in 2020 during the pandemic, provides tips ranging from zero waste to-go kits to sustainable cleaning products.

"Influencers have become the new gatekeepers of consumer attention, especially for younger generations," Barbara Engels, senior economist at the IW institute told Reuters. "Luxury is out, values are in."

Such a trend may continue. Close to 60% of the Germans reported consuming sustainably in some way, while 71% said they would like to do more, a 2023 study from the Development Engagement Lab showed.

"The project ‘making German consumers spend again’ will not be an easy one and requires patience and stamina," said Brzeski. 

($1 = 0.8771 euros)

(Reporting by Maria Martinez; editing by Matthias Williams and Toby Chopra)