European June Retail Sales Decline by Most Since at Least 1995

By Brian Swint

Aug. 5 (Bloomberg) -- European retail sales dropped by the most in at least 13 years in June as a surge in oil and food costs left consumers with less money to spend on other goods.

Sales in the 15-nation euro area fell 3.1 percent from a year earlier, the largest annual decline since the European Union's statistics office in Luxembourg began collecting the data in 1995. That was more than twice the 1.3 percent drop expected by economists, according to the median of 16 forecasts in a Bloomberg News survey. From May, sales fell 0.6 percent.

Higher oil and food costs are eroding households' purchasing power across the region and crimping sales at Unilever, Beiersdorf AG and other consumer-products makers. European Central Bank President Jean-Claude Trichet, who last month raised interest rates to curb price increases, said July 18 that economic growth will endure a ``trough'' in the six months through September.

``We could possibly have negative growth in the third quarter. Household spending has been very weak,'' said James Shugg, an economist at Westpac Banking Corp. in London. ``We see the ECB cutting rates in the early part of next year.''

Sales of food products declined 4.4 percent in June from a year earlier, while non-food goods decreased 2.2 percent, the statistics office said in today's report. From May, food sales fell 0.4 percent and non-food items dropped 0.6 percent.

Unilever, the world's second-biggest consumer-products company, last week said net income dropped 20 percent in the quarter ended in June after price increases for products ranging from Magnum ice cream to Omo detergents hampered sales. Unilever, based in London and Rotterdam, said volume in Europe fell 2.9 percent in the second quarter.

Consumer Spending

Hamburg-based Beiersdorf AG, the maker of Nivea skin creams, today said sales growth slowed and its operating margin narrowed in the latest quarter. Weaker consumer spending in western Europe and the U.S. prompted L'Oreal SA, the world's biggest cosmetics maker, to cut its sales forecast last month after reporting the smallest gain in more than three years.

Consumer-price inflation accelerated to 4.1 percent in July, the fastest pace in more than 16 years, as crude oil climbed to a record above $147 a barrel. The higher energy prices are pushing up raw-material costs and putting pressure on companies to pass along the increases to consumers.

Producer prices rose 8 percent in June, the most in at least 18 years, data released yesterday showed. A gauge of companies' selling-price expectations rose to a 13-year high last month, the European Commission reported July 30.

Living Expenses

The ECB raised its key interest rate to the highest in seven years last month on concerns consumer-price growth at twice the 2 percent limit will become embedded in the economy even as growth slows. The central bank has urged labor unions not to seek bigger pay raises to compensate for increased living expenses, saying inflation will return to the ECB's ceiling within 18 months.

All 60 economists in a Bloomberg News survey say they expect the ECB to keep the benchmark rate at 4.25 percent when policy makers meet in Frankfurt Aug. 7.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.