German Retail Sales Take A Dive - Without The Swan

The FACT: German ex-auto retail sales fell sharply in June, the second sharp drop in a row after posting a strong gain in April.

THE REVERSAL: After a terrible January German non-auto retail sales have been on a nice strong recovery path as sales cut their decline of over 1% (m/m) in January to drop of -0.2% in February then rose in March and rose strongly in April by 1.8%. That was before this new episode in which they have posted back to back large drops in May and in June.

THE IMPACT: Despite the disappointing numbers in the last two months, earlier increases will hold retail sales ex-autos flat in real terms; the nominal numbers will rise by 1.7% at an annual rate in Q2.

THE PARADOX: The retail sales report was a bitter one for June and it comes in a day that Europe-wide and German MFG PMI results we better-than-expected. The EMU report registered its second highest month-to-month gain in its relatively modest history- still an impressive jump. The German MFG reading rose to 45.7 on its largest point gain ever, reaching a ten-month high, although still indicating a declining state. All of that is impressive.

THE UPSHOT: So the day’s reports are mixed. In Europe and in Germany manufacturing is making a strong step toward recovery. Still, the level of the reading tells us that the strong month-to-month improvement leaves industry output contracting. The retailing sector that had begun to look like it was in a state of repair is now looking much worse. While the quarter will not end too badly for German retail sales that is because of past strength. The recent collapse in retail sales should be a warning to policymakers about complacency – even in the face of a manufacturing turnaround that is in progress.

THE FUTURE: The new bout of retail weakness puts retail sales in a deep hole from which to start off in 2009-Q3. For example if German retail sales do not rise in July they will carry a growth rate off the previous quarter of -6.4% at annual rate in Q3 over Q2. This is a big inherited weakness that is unlikely to spur any increase in the output of consumer goods in Germany – setting aside the auto sector where special incentives are having a positive impact. The optimistic spin here is that all of consumer attention is going into the auto incentives and that is leaving other retail behind. Things may not be as weak as they seem by looking at non-auto retail sales alone. That may be true, but that is only a matter of solace if attention and spending in the non-auto sector turns up, because it is starting off Q3 in a really deep hole. The auto sales revival in Q2 will only make it that much more difficult to get Q3 sales higher. In other words if the auto incentives don’t stay in place and do not continue to have a strong positive impact, German overall retail sales will become a heavy negative weight on German GDP in Q3.