Sharp decline in retail sales adds to eurozone economic gloom

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Eurozone retail sales fell more than expected in March, adding to fears that soaring inflation and concerns over Russia’s invasion of Ukraine have negated the boost in consumer spending sparked by the lifting of restrictions linked to the pandemic.

The disappointing data added to fears that the euro zone risks sliding into stagflation – stagnant growth and high inflation – after figures released on Friday showed the bloc had weaker first quarter growth and higher price increases. than expected in April.

The 0.4% drop in March, retail spending for the previous month, which Eurostat adjusted for price, timing and seasonal effects, was below the 0.1% decline economists expected, according to a Reuters poll. It reversed a 0.4% rise in February.

“The March retail sales data is a clear signal that higher inflation is holding back spending growth,” said Melanie Debono, senior economist at Pantheon Macroeconomics, adding that eurozone retail sales fell. 0.8% in the first quarter, reversing a 0.5% rise in the fourth quarter of last year.

The biggest decline was in Spain, where sales fell 4% in March, while France and Germany also suffered declines. There were strong increases in many Eastern European and Baltic countries, such as an increase of 11.4% in Slovenia and 7.3% in Hungary. Italy will release its latest retail sales data on Friday.

Sales of food, beverages and tobacco increased in March, but this was offset by lower sales of motor fuel, mail-order and Internet sales and other non-food products.

Many EU countries significantly eased their Covid-19 restrictions in March, such as requiring people to wear a mask or show a vaccine pass to enter indoor spaces, a move that is expected to boost spending of consumption.

S&P Global Survey of Purchasing Managers Reveals Activity in Eurozone Services Sector accelerated in April. But Chris Williamson, economist at S&P Global, said it was “unclear whether the services sector can sustain its current growth once the initial rebound from the reopening of the economy wanes, particularly given given the soaring cost of living.

The recent spike in energy and food prices is expected to erode household purchasing power, especially as wages in the bloc have not kept pace with inflation, which has reached a new euro zone record of 7.5% in April.

Line chart of annual % change in consumer price index showing eurozone inflation hitting new high

Consumer confidence has been hit since Russia invaded Ukraine on February 24. The EU Consumer Confidence Index compiled by the European Commission fell to a two-year low in April, when fewer people said they intended to make big purchases.

Consumers are partially shielded from the impact of rising energy prices after governments such as those in Germany, France, Italy and Spain announced more than $80 billion euros in measures to reduce taxes or finance rebates on fuel, electricity or natural gas.

But economists fear that an escalation in Western sanctions against Moscow could cause energy shortages for industry and push prices even higher, eroding household incomes and further undermining consumer and business confidence.

Last week Russia cut off gas supplies to Poland and Bulgaria and on Wednesday the EU announced its intention to gradually ban imports of Russian oil as part of the bloc’s sixth round of sanctions against Moscow.

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