German Sales Fall More Than Expected Amid Slowdown

By Simone Meier and Simon Kennedy

Aug. 1 (Bloomberg) -- Retail sales in Germany fell more than twice what economists expected in June as evidence builds that Europe's largest economy contracted in the second quarter.

Sales, adjusted for inflation and seasonal swings, slid 1.4 percent from May, when they rose 0.5 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a drop of 0.5 percent, the median of 29 estimates in a Bloomberg News survey shows. The euro extended a decline against the dollar.

German growth is now slowing after it initially avoided being dragged down by weakness in the U.S. economy and smaller European nations such as Spain and Ireland. Faster inflation is eroding households' purchasing power as the euro's appreciation against the dollar in the past year hobbles exporters.

``Europe's former stronghold of growth has entered a sharp slowdown,'' said Stephane Deo, chief European economist at UBS AG in London. ``The German economy is now joining the other large European countries on their way down.''

Retail sales declined 3.9 percent in the year and fell 0.8 percent in the first six months of 2008 from the year earlier period, the statistics office said.

Consumer confidence dropped to its lowest in more than five years and German unemployment fell at a weaker pace in July, reports showed this week. Business confidence fell the most since the 9/11 terror attacks last month, manufacturing orders unexpectedly declined for the sixth time in succession and industrial production had its biggest decrease 9 years.

``Negative growth in the second quarter seems to be an almost unavoidable fact,'' said Carsten Brzeski, an economist at ING Groep NV in Brussels. The German economy grew 1.5 percent in the first quarter, the strongest expansion in 12 years, and hasn't shrunk since the third quarter of 2004.

Waning Confidence

German households are cutting back spending after inflation accelerated to 3.4 percent in June, the highest rate since Germany started using a harmonized European Union method in 1996. Crude oil prices reached a record $147.27 a barrel on July 11. At the same time, oil's surge to a record is hurting the budgets of households and companies, while the euro's 14 percent rise against the dollar in the last year is eroding shipments from the world's biggest exporter.

Hertie, the German department-store chain partly owned by London-based Dawnay Day Group, yesterday filed for insolvency protection from creditors in a German court. Hertie operates 73 department stores in Germany and has 4,100 workers.

Other companies are seeking to tap into faster-growing markets abroad. Hugo Boss AG, Germany's largest clothing maker, yesterday reported a narrower second-quarter loss on increasing sales outside its home market.

The German slowdown complicates the outlook for the European Central Bank after it raised its benchmark interest rate last month to 4.25 percent amid the fastest inflation in 16 years. Its governing council convenes Aug. 7 with all 29 economists surveyed by Bloomberg News predicting it will leave rates unchanged.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net