European June Retail Sales Slump, Confidence Slips, PMI Shows

By Fergal O'Brien

June 27 (Bloomberg) -- European retail sales plunged in June as soaring fuel and food prices hit consumers' budgets, prompting stores to cut jobs and lose confidence about their prospects, the Bloomberg purchasing managers index showed.

The measure of sales activity in the euro region declined to 44 from 53.1 in May. A reading below 50 indicates contraction. The index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by Markit Economics, is at the second-lowest level since its introduction in January 2004. Sales also fell from a year earlier.

Higher bills and the fastest inflation in 16 years are eating into household income and sapping consumer confidence. Gruppo Coin SpA, Italy's largest department-store chain, said this month that first-quarter profit fell 61 percent after consumer demand weakened.

``In the near term, what we're seeing is rising food and energy prices and that's really hitting household purchasing power,'' Nick Kounis, an economist at Fortis Bank in Amsterdam. ``It's having an impact on confidence and the evidence we have in the second quarter suggests growth was very weak.''

Sales fell across Germany, France and Italy -- the largest economies in the euro zone -- led by Italy, where retail spending dropped at the fastest rate in the survey's history. A measure of employment fell to 48.6 in June from 49.9 in May, the report showed, staying below 50 for a third month.

Consumer confidence in France fell to a record low in June, according to figures published yesterday. Sentiment has also declined in Germany and Italy, separate data this week showed.

Higher Prices

Crude-oil prices have doubled in the last 12 months and touched a record above $140 a barrel today. Euro-area food-price inflation accelerated to 6.4 percent last month on higher prices for milk, cheese, bread and fruit.

``We are seeing a continuing decline in consumer confidence and we anticipate further difficult trading conditions ahead,'' Jean-Noel Labroue, chief executive officer of Kesa Electricals Plc, said on June 24. Kesa has electronics stores in France and Italy.

At the same time, the credit-market turmoil and cooling economic growth are threatening employment, which may further undermine consumer sentiment and spending. UniCredit SpA, Italy's biggest bank, yesterday said it plans to cut 9,000 jobs, or 5 percent of its workforce.

Some retailers appear to be coping with the downturn. Hornbach Holding AG, the German operator of home-improvement stores in nine countries, said first-quarter sales rose 6.1 percent, helped by growth outside Germany. It sees sales rising by a ``medium single-digit'' percentage this year.

`Extremely Confident'

PPR SA, owner of the Gucci luxury-goods brand, earlier this month said it's ``extremely confident'' about its performance this year.

``Wage growth is accelerating and employment growth holding up, but rising prices are undoing that stimulus,'' Kounis said. ``If commodity prices do stabilize, then the outlook for spending would improve.''

Still, today's report showed that retailers' gross margins declined at the second-fastest rate in the survey's history as purchasing prices rose ``rapidly'' and sales missed targets, Markit Economics said.

German retailers expect to miss their targets again in July, while Italian and French retailers became less confident about meeting their goals, according to Markit Economics. Inditex SA, Europe's largest clothes retailer, reported its smallest profit gain in four years this month after sales growth slowed at the Zara chain.

For the Bloomberg retail indicator, Markit Economics recruited a panel of companies in Germany, France and Italy, which together make up around 80 percent of total euro-area retail sales by value. The panel includes large chain retailers as well as smaller stores.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.