Are you sure?

European retail sales dropped in January

European retail sales dropped for the first time in 10 months in January as spending in Germany slumped, adding to signs economic growth is slowing, the Bloomberg purchasing managers index showed.

An index measuring retail sales in the 13-nation euro economy fell to a seasonally adjusted 47.9, the lowest since February 2005, from 52.1 in December, a survey of more than 1,000 retail executives compiled for Bloomberg LP by NTC Economics Ltd. showed. A reading below 50 indicates contraction. Today's report shows German Chancellor Angela Merkel's sales-tax increase prompted consumers in Europe's largest economy to curb spending, and is further evidence economic growth is slowing from its fastest pace in six years. Expansion in the European service and manufacturing industries lost momentum in December and business and consumer confidence dropped in Germany and Italy this month. „The impact of the VAT increase won't be limited to only one month,” said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. „But if there's no marked deterioration on the labor market, there's a good chance we'll see reviving growth from the Q2.” The euro-region's economic expansion will slow to about 2.2% this year from 2.7% in 2006, the most since 2000, according to European Central Bank forecasts.

German retail sales had the biggest drop in two-and-a-half years, with its index declining to 43.9 from 55.2 in December, today's report showed. In France, sales slowed for a third month, while in Italy they rose modestly. The decline in the euro-region indicator „reflected a steep sales drop in Germany, which contrasted with strong growth in previous months and was widely linked to January's increase in sales tax,” NTC said. Merkel raised value-added tax to 19% from 16% on January 1 to help reduce the country's budget deficit. Henning Kreke, CEO at Douglas Holding AG, Europe's largest retailer of cosmetics and perfume, said January 17 that he's „concerned” the VAT increase may „cause a dip” in consumer spending this year. Douglas is among German companies expanding outside their home market.

Retail employment fell for the first time in 10 months, led by declines in Germany and France, as companies sought to reduce costs amid falling sales, NTC said. PPR SA, the owner of Gucci Group based in Paris, on January 25 reported weaker sales at its French retail chains including Conforama furniture stores and Fnac book and electronics shops after French consumer confidence dropped for a third month in December. „Retail sales have slowed down,” PPR CFO Jean-Francois Palus said. „Consumer confidence is eroding.” Retailers' profits declined at the fastest pace in four months in January, with a gauge of profit margins dropping to 45.4 from 45.9 in December, today's report showed. The decline was linked to special offers and increased competition, NTC said. Still, retailers became more confident about trading next month. A gauge of expected sales rose to 54.9 from 52.9, „suggesting that sales growth may pick up, albeit only modestly,” NTC said. Optimism was the highest among Italian retailers and the lowest in Germany.

Prices paid by retailers for re-sale continued to rise, albeit at a slower pace than in December. The gauge of retail sector purchase price inflation eased 59.1 from 60.4, NTC said. The ECB has already signaled it will raise interest rates again in March to curb inflation after six increases since December 2005. ECB council member Axel Weber said in an interview on January 26 that the euro-region economy is „strong” and „doesn't need any more monetary stimulation.” Investors expect the Frankfurt-based ECB to raise its main lending rate, currently at 3.5%, twice more this year, futures markets suggest. The yield on the three-month Euribor futures contract for March was at 3.92% today. The December contract was at 4.17%. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999. For the Bloomberg retail indicator, NTC recruited a representative panel of retail companies in Germany, France and Italy, which together make up 80% of total euro-region retail sales by value. The panel includes large chain retailers as well as smaller stores. (Bloomberg)