Nov 7, 2011
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Inflation, debt crisis hurt euro zone retail sales

Nov 7, 2011

BRUSSELS - Retail sales in the 17 countries sharing the euro fell more than expected in September despite some resilience in powerhouse Germany, the EU's statistics office said on Monday, reinforcing concern that the bloc's economy may be heading for a recession.

In the first negative reading since May, sales slipped 0.7 percent in September from the previous month, Eurostat said in an initial estimate. That was much worse than the 0.1 percent decrease forecast in a Reuters poll of economists. Sales in the 27-nation European Union fell 0.3 percent in the same period.

"It was a pretty disappointing figure," said Juergen Michels, an economist at Citigroup. "The 0.7 percent decline in retail sales really suggests there is a huge amount of uncertainty coming through to consumers."

Inflation, volatile financial markets and stress from Europe's sovereign debt crisis are combining to keep potential shoppers at home, particularly as euro zone unemployment rose slightly in September.

Retail trade in the euro zone also fell 1.5 percent on an annual basis in September and by 0.8 percent in the EU as a whole, Eurostat said.

Germany reported a 0.4 percent increase in retail sales in September, compared to August, but there was a decline in France, where sales fell 0.6 percent.

Sales in Spain, the single currency's fourth-largest economy, tumbled 1.7 percent as the country continued to struggle with the highest jobless rate in the euro zone, which is crimping consumer spending.

Sales of food, drinks and tobacco in the euro area in September were flat. Sales of goods other than fuel fell 0.8 percent, Eurostat said, although more detail was not immediately available.

Some economists had expected consumer spending to pick up the slack from slowing exports and support Europe's economies as the region's debt crisis and cooler demand in Asia and the United States curtail a two-year manufacturing rebound.

But Europeans are worried by the worsening economic outlook and are limiting their spending. Budgets are also being squeezed by higher energy prices and tax increases which fueled 3 percent inflation in October.

The European Central Bank cut interest rates by a surprise 25 basis points last week to 1.25 percent to try to boost the euro zone, but some economists still predict a recession.

"Our view that the euro area would slide into recession in the current (fourth) quarter appears to be playing out," investment bank J.P. Morgan said a report, predicting a 1 percent economic contraction in the last three months of the year and a return to growth only in the fourth quarter of 2012.

That could prompt the ECB's new president, Mario Draghi, who has also warned of a possible recession, to cut rates again in December, economists say.

(Reporting By Robin Emmott; editing by Rex Merrifield/Anna Willard)

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