A sharp decline in retail sales is contributing to the economic slowdown in the euro zone


Euro-zone retail sales fell more-than-expected in March, fueling fears that rising inflation and worries about Russia’s invasion of Ukraine have wiped out a boost in consumer spending prompted by the lifting of pandemic restrictions.

The disappointing data fueled concerns that the euro zone could slip into stagflation – stagnant growth and high inflation – after figures released on Friday showed the bloc had weaker growth in the first quarter and higher-than-expected price increases in April.

The 0.4 percent drops In March, retail spending for the previous month, which Eurostat had adjusted for price, calendar and seasonal effects, was below the 0.1 percent decline economists had expected, according to a Reuters survey. In February, it reversed a 0.4 percent increase.

“March retail sales are a clear signal that higher inflation is dampening spending growth,” said Melanie Debono, senior economist at Pantheon Macroeconomics, adding that euro-zone retail sales fell 0.8 percent in the first quarter and thus reversing an increase of 0.5 percent in the fourth quarter of last year.

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

Food, beverage and tobacco sales rose in March, but this was offset by lower sales of auto fuel, mail order and internet sales and other non-food items.

Many EU countries significantly eased their Covid-19 restrictions in March, such as requiring people to wear a mask when entering indoors or show their vaccination card, a move expected to boost consumer spending.

A survey of purchasing managers by S&P Global revealed activity in the Eurozone service sector accelerated In April. However, Chris Williamson, economist at S&P Global, said it is “unclear whether the service sector can sustain its current growth if the initial recovery from the economy reopening fades, particularly given the rising cost of living”.

Recent hikes in energy and food prices are likely to weigh on households’ purchasing power, especially as bloc wages have not risen in line with inflation, which hit a new euro-zone record of 7.5 percent in April.

Line chart of annual percentage change in consumer price index, showing eurozone inflation rising to a new record high

Consumer sentiment has been tarnished since Russia invaded Ukraine on February 24th. European Commission’s EU Consumer Confidence Index fell to a two-year low in April, when fewer people said they intend to make large purchases.

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

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

Russia last week halted gas supplies to Poland and Bulgaria, and on Wednesday the EU announced plans for a phased import ban on Russian oil as part of the bloc’s sixth package of sanctions against Moscow.


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