European Retail Sales Fall for Third Month, PMI Shows

By Jennifer Ryan
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Aug. 28 (Bloomberg) -- European retail sales declined for a third month in August after the fastest inflation in 16 years and the prospect of a recession eroded consumer confidence, the Bloomberg purchasing managers' index showed.

While a measure of sales activity in the euro region increased to 47.7 from 46 in July, it's still the third month that the reading held below 50, the dividing line between growth and contraction. The survey of around 1,200 executives compiled for Bloomberg LP by Markit Economics showed retailers cut jobs for a fifth month.

Europe's economy contracted in the second quarter and recent reports suggest it's struggling to resume growth as rising prices erode household spending power. With inflation at double the European Central Bank's 2 percent ceiling, council member Axel Weber said Aug. 26 that the ECB has no scope to encourage a recovery by cutting interest rates.

``Inflation is squeezing disposable incomes and the outlook for consumer spending and for retailers is gloomy,'' said Ken Wattret, an economist at BNP Paribas SA in London. ``The ECB recognizes the downward risks to growth but it's not giving any indication it will respond while inflation is above the desired level.''

The German retail sales index dropped to 44.1 in August from 46.4 in the previous month, Markit said. The Italian gauge increased to 44.8 from 38.2 and the French measure rose to 53.7 from 51.3.

Recession Risk

Today's report adds to evidence Europe is edging towards a recession, typically defined as two quarters of contraction. German business confidence fell to a three-year low last month while consumer sentiment slumped to the weakest since 2003. In France, the stock of new, unsold homes reached a record in the three months through June.

``The latest contraction was largely attributed to continued caution amongst consumers with regard to discretionary spending, given the uncertain economic outlook,'' the Markit report said.

Retailers are cutting workers as sales decline. Metro AG, Germany's largest retailer, said July 31 it had a second-quarter loss after shutting Real superstores, which missed profit goals as consumers shifted to discount grocers. Markit's index of employment was at 48.7 compared with 48.6 in the previous month.

Stubborn Inflation

Faster inflation is making it harder for policy makers to help consumers and companies. Oil rose above $147 for the first time in July while corn prices climbed to a record the previous month. Weber said inflation is the ``No. 1 worry for central bankers in the euro region.'' Vice President Lucas Papademos said yesterday the pace of price increases is ``stubbornly high.''

Some companies are nevertheless benefiting from consumers' drive to cut costs. Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, said July 11 second-quarter sales rose as French shoppers went to its discount stores.

Inflation pressures may also ease now that oil prices have fallen about 20 percent from their peak last month. Markit's measure of prices paid for goods for resale fell to 62.7 from 67.3, the biggest decrease since data begin in 2004.

The ECB said today that M3 money supply, which it uses as a gauge of future inflation, rose 9.3 percent from a year earlier after increasing 9.5 percent in June. Loans to the private sector grew 9.4 percent in the year, down from 9.9 percent in June.

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: Jennifer Ryan in London at Jryan13@bloomberg.net