German Retail Sales Rose More Than Economists Expected in May

By Simone Meier

July 1 (Bloomberg) -- Retail sales in Germany, Europe's largest economy, increased more than economists expected in May, even as faster inflation sapped households' purchasing power.

Sales, adjusted for inflation and seasonal swings, rose 1.3 percent from April, when they dropped 0.6 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 0.8 percent, the median of 33 estimates in a Bloomberg News survey shows. In the year, sales increased 0.7 percent.

German households may cut back spending after surging food and oil prices pushed inflation to 3.4 percent last month. The European Central Bank has already said it may raise borrowing costs this week, suggesting it's more concerned about faster inflation than slowing economic growth and rising unemployment.

``It's more of a counter-reaction after two very negative months,'' said Carsten Klude, head of investment strategy at M.M. Warburg & Co. in Hamburg. ``We have to bury any hope for a revival in consumption this year. There's no room for an improvement as long as inflation remains at such a high level.''

In the year's first five months, sales declined 0.4 percent from the year earlier period when adjusted for inflation, while rising a nominal 2.2 percent, today's report showed.

Praktiker AG, Germany's second-largest home-improvement retailer, said May 30 that business was ``clearly better'' in the second quarter, following price cuts. Revenue growth will increase by a ``mid single-digit'' this year.

Oil Prices

Crude oil prices have increased 47 percent this year, breaching $140 a barrel for the first time last week. Rising energy costs were the main reason why German inflation accelerated in June to the fastest since European Union records began in 1996.

German consumer confidence fell to the lowest in more than two years in July, Nuremberg-based market-research company GfK said on June 24. GfK on that day also cut its forecast for consumer spending this year to 0.5 percent from 1 percent.

The pace of German growth may slow by half next year partly because of weaker consumer demand, the IMK economic research institute said on June 26. Growth in the economy may cool to 0.9 percent from 1.8 percent in 2008, Dusseldorf-based IMK said.

The economy is already losing momentum. Unemployment unexpectedly rose in May for the first time in more than two years and retail sales shrank last month. Investors and executives also grew more pessimistic in June.

Still, the ECB on July 3 will probably increase its key rate by a quarter-point to 4.25 percent, according to all but two out of 57 economists in a Bloomberg survey. The Frankfurt-based bank last raised borrowing costs in June 2007.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net
Last Updated: July 1, 2008 02:21 EDT