EconomySharp fall in retail sales adds to eurozone economic...

Sharp fall in retail sales adds to eurozone economic gloom

Eurozone retail sales fell more than expected in March, compounding fears that surging inflation and worries about Russia’s invasion of Ukraine have cancelled out the boost to consumer spending delivered by the lifting of pandemic restrictions.

The disappointing data added to concerns that the eurozone risks sliding into stagflation — stagnant growth and high inflation — after figures released on Friday showed the bloc had weaker growth in the first quarter and higher price increases in April than expected.

The 0.4 per cent drop in March retail spending from the previous month, which Eurostat adjusted for price, calendar and seasonal effects, was below the 0.1 per cent decline expected by economists, according to a Reuters poll. It reversed a rise of 0.4 per cent in February.

“March’s retail sales data are a clear signal that higher inflation is dampening spending growth,” said Melanie Debono, senior economist at Pantheon Macroeconomics, adding that eurozone retail sales fell 0.8 per cent in the first quarter, reversing a 0.5 per cent rise in the fourth quarter of last year.

Line chart of Eurozone retail sales index (2015 = 100) showing Retail spending goes into reverse

The biggest fall was in Spain, where sales fell 4 per cent in March, while France and Germany also suffered declines. There were strong increases in many eastern European and Baltic countries, such as an 11.4 per cent rise in Slovenia and 7.3 per cent jump in Hungary. Italy will publish its latest retail sales data on Friday.

Sales of food, drinks and tobacco rose in March, but this was offset by lower sales of automotive fuel, mail order and internet sales and other non-food products.

Many EU countries significantly eased their Covid-19 restrictions in March, such as the requirement to wear a mask or to show a vaccine pass to enter indoor spaces, a move that was expected to boost consumer spending.

A survey of purchasing managers by S&P Global found eurozone services sector activity accelerated in April. But Chris Williamson, an economist at S&P Global, said it was “unclear as to whether the service sector can sustain its current growth once the initial rebound from the reopening of the economy fades, especially given the soaring cost of living”.

The recent surge in energy and food prices is expected to erode the purchasing power of households, especially as wages in the bloc have not risen in line with inflation, which hit a new eurozone record of 7.5 per cent in April.

Line chart of Annual % change in consumer price index showing Eurozone inflation rises to a new record high

Consumer sentiment has been hit since Russia invaded Ukraine on February 24. The European Commission’s index of EU consumer confidence fell to a two-year low in April, when fewer people said they intended to make big purchases. 

Consumers are being partially shielded from the impact of higher energy prices after governments, such as those in Germany, France, Italy and Spain, announced more than €80bn of measures to cut taxes or to fund rebates on fuel, electricity or natural gas.

But economists worry that an escalation of western sanctions on Moscow could cause energy shortages for industry and send prices even higher, eroding household income and further denting consumer and business confidence. 

Russia last week cut off gas supplies to Poland and Bulgaria and on Wednesday the EU announced plans for a phased-in ban on imports of Russian oil as part of the bloc’s sixth package of sanctions against Moscow.

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