Retail demand in the Euro-Zone rebounded in June, after weak growth in May. On a year-to-year basis, retail sales in the Euro-Zone (12 countries with a common currency) were up 1.5 percent over last year, a solid gain after much volatility earlier in the year.

 

Retail sales in all 25 European Union countries were stronger – posting a gain of 2.7 percent in June 2006 over the same month a year ago.

 

The graph below summarizes retail sales on a year-over-year basis for the twelve Euro-Zone common currency countries.

 

Source:  EuroStat

Retail Sales Strong Across the Region

Retail sales perked up in June across both the Euro-Zone and the wider European Union. Coincidently, retail sales were also strong in many countries bordering the EU.

 

Unlike prior months, retail sales gains were about equal in the “food” and “non-food” categories, the two major reporting segments for retail sales. Food sales were up 1.4 percent while non-food sales were up 1.6 percent, yielding a blended retail sales gain of 1.5 percent. Euro-Zone retail sales are summarized by broad categories; thus, jewelry sales trends are not available. However, jewelry demand tends to reflect broader market trends. This would indicate that jewelry sales likely picked up in June for Euro-Zone jewelers.

 

Retail demand in June was distorted – and boosted – by activity related to the World Cup. As the table below illustrates, Germany was the major beneficiary, with a solid 1.9 percent increase in retail sales year-over-year.

 

Source:  EuroStat

 

Factors Affecting Retail Demand

On the positive side, there are two key factors driving retail demand: 1) declining unemployment; and, 2) rising confidence.

 

On the negative side, two key factors are dampening consumer demand: 1) rising prices; and, 2) rising interest rates. Further, consumer debt is high in the common currency area, and the prospects of servicing that debt as interest rates rise is a shopping turn-off.

 

Other factors affecting June retail sales included the following:

 

• The jobless rate in the EU25 fell one-tenth of a point to 8.1 percent in June, while the smaller Euro-Zone experienced a jobless dip to a 4 1/2 year low of 7.8 percent. The corresponding figures for last year were 8.8 percent and 8.6 percent.

• Interest rates are rising across much of Europe. Central banks are actively raising rates, including ECB, Switzerland, Sweden, Norway, Iceland, Russia, Czech Republic, Turkey, Hungary, and the U.K.

• Spending activity in the larger western European countries has not stabilized yet, but the trends are positive. German retail sales were quite strong, as were France’s retail sales. Consumer demand was very strong in the U.K., where retail sales advanced by 4.1 percent over the same month a year ago.

European Economic Outlook: Improving

As the Euro-Zone recovery continues to take hold and underlying economic fundamentals improve, we expect to see continuing solid gains in retail sales. Some factors that could affect consumer demand include the following:

 

• Spending activity in the EZ is expected to remain buoyant, with household consumption bolstered by strong wage gains and robust economic growth.

• European unemployment continues to decline. Government policies are set to further reduce jobless levels in Germany and France. In the U.K., we believe that the current labor market deterioration is at its worst. In short, a firming labor market in Europe will strengthen household finances and lead to increased spending for retail goods.

• Energy costs are a downside risk, with elevated oil and gas prices cutting into consumers’ disposable income.

• Interest rates are rising, a trend that will continue near term.

• Household debt is high. French households reported their highest rate of debt ever in 2005. In Britain, the average household’s post-tax income going toward debt payments rose in the first quarter to 19.4 percent. This compares to 13.9 percent in the U.S.

Statistical Note

Preliminary country-by-country retail sales figures are subject to significant revision for several months after they are initially reported. Thus, readers should use the latest IDEX Online retail sales tables, all of which reflect those monthly revisions.