Dismal EU retail trade data ahead of a crucial ECB policy meet has raised the question whether expectations of an European economic recovery were too hasty, Team IFM reports
Brussels, February 6: Christmas shopping seems to have brought little cheer for European retailers last December as sales fell compared to both the preceding month and the year-ago period, according to data released by the European Commission ahead of Thursday’s crucial European Central Bank policy meeting.
In the process, the figures compiled by the European Commission’s data office Eurostat also raise two critical questions for ECB policymakers: Have expectations of a euro zone economic revival been too hasty? And more importantly, does it signal the time for another rate cut to fuel consumption and stoke growth?
Eurostat said retail trade in the 18-member euro zone had dipped 1.6 per cent month-on-month in December despite the traditional shopping spree in the run-up to Christmas. Interestingly, the fall came after the retail sector had grown 0.9 per cent in November 2013 over that of the preceding month.
The larger European Union boasting of 28 members too saw retail volumes shrink, by 0.8 per cent, though Britain, one of the bigger Continental economies, was among the few to have bucked the trend. In the EU, volumes had risen 0.8 per cent in November.
Eurostat’s first estimates of economic growth in the euro zone in the fourth quarter of 2013 are due as shortly as next week – on February 14. The retail sector’s performance contributes significantly to growth, and Wednesday’s sales data could be a cause of concern for policymakers.
Till now, everything seemed to be going smoothly; data released earlier this week by independent research group Markit indicated European manufacturers went on a swift canter in January, riding a wave of new orders that revved production and fuelled the strongest rate of expansion since May 2011.
Markit said its economic indicator – the Purchase Managers’ Index or PMI – for the euro zone’s manufacturing sector in January rose unexpectedly to 54, surpassing analysts’ expectation of it remaining unchanged at December’s level of 53.9.
Wednesday’s Eurostat data seems to have pricked the optimism balloon. Newswire service Associated Press quoted James Ashley, senior European economist at RBC Capital Markets, as saying: “We think the recovery for the economy as a whole continues, but at an anaemic pace.”
Jonathan Loynes, chief European economist at London-based market tracker Capital Economics, told the agency the depressed retail performance meant that growth was still too weak to solve the region’s debt and unemployment problems, even though the PMI suggested the wider economic recovery picked up at the start of the year.
“Accordingly, a consumer-led recovery does not seem likely,” Loynes said.
Retail Blues
The 1.6 per cent sales slide in the euro zone represented the third monthly fall in the September-December period, and worse, the biggest slide in one single month since May 2011 – a stretch of two and a half years. The sector had displayed a rise only in November.
In year-on-year comparisons too, sales volumes slid 1 per cent in the euro zone in December 2013 when compared to the same month the previous year. However, thanks to Britain, EU retail volumes rose 0.1 per cent from the year-ago period.
The overall annual picture was equally depressing; Eurostat said the average volume of retail trade for the 12-month period in 2013, compared with that in 2012, fell 0.9 per cent in the euro area and 0.2 per cent in the 28-member European Union.
Among the 22 euro zone members that declared results, only six registered an upward trend; the remaining 16 including Germany declined, Eurostat said.
The largest falls were witnessed in Portugal, down 5.8 per cent when compared to November 2013, Spain (a 3.6 per cent drop) and Germany (2.5 per cent decline).
By comparison to most European nations, Britain fared well. It was the best month-to-month performer and saw its retail segment expand 2.6 per cent from November, followed by Malta with a 2 per cent upswing and Ireland, where volumes rose 1.4 percent in December over the previous month.
This was a far cry from an economic revival that Markit’s manufacturing data from earlier this week had indicated. “Perhaps the most important development in the report is the further revival of manufacturing in the region’s periphery,” Markit’s Chief Economist Chris Williamson had said, referring to the factory output data in economies such as Spain.
Outside the euro zone, it said, factories in Britain too piggybacked fresh orders from home and abroad, prompting Markit’s senior economist Rob Dobson to observe, “The long awaited rebalancing of economic growth may also finally be within sight.”
Similar hope was expressed for euro zone economies as well. In fact, Markit’s Williamson had even said the improving economic picture painted by the PMI took the pressure off ECB policymakers to add more stimuli.
ECB Options
In light of Eurostat’s data, that seems unlikely; if anything, the belief now is that it would likely ratchet up the pressure on the European Central Bank to announce some sort of stimuli such as easier monetary policy to trigger a recovery.
This includes further rate cuts, though its key interest rate – the rate at which it lends to regular commercial bank – is already at an all-time low of 0.25 per cent, and could effectively baulk the ECB from taking that route.
“The difficulty that the ECB faces is that interest rates are already very low,” Sandra Holdsworth, fixed income investment manager at Kames Capital, told The Wall Street Journal. “Cutting the deposit rate below zero would be a big leap while there are also doubts over the efficacy of certain non-standard measures.”