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Economy in Brief

Euro Area Retail Sales Remain Weak
by Robert Brusca  July 6, 2022

The graph shows the clear trend of euro area retail sales and unit sales of motor vehicles. The trends have been withering for some time. The table reveals the specifics on data arrayed by month or grouped into different periods to reveal trends. In May total retail sales volume in the euro area rose by 0.2% following a 1.4% drop in April and a 0.5% increase in March. Over three months, the retail volume is declining at a 2.8% annual rate; that's an improvement from the six-month growth rate of -4.4% but still a deterioration from a 0.2% decline over 12 months.

Two months into the second quarter (quarter-to-date), retail sales are falling at a 3.7% annualized pace. Retail sales in the euro area clearly are weak and challenged. The ECB is encountering an inflation rate well above its target and continues to make plans to do something about it; as the ECB take steps, the prospects for growth and for retail sales in the euro area are going to diminish.

A few early reporters in the EMU provide up-to-date information on sales trends. In Germany retail volumes increased by 0.6% in May, in Spain they were flat, and in Portugal real retail sales rose by 1.5%. The strongest gains for May, in Germany and Portugal, reflect increases following sizable declines in April, but the flatness in Spain follows a sizable increase in April.

Over three months the German retail sales volume is falling at a 12% annual rate, whereas in Spain it's rising at a 3.3% annual rate, and in Portugal rising at a 2.3% annual rate. All three countries show sizable declines in real retail sales over six months. Over 12 months German retail volumes are down by 3.6%, against Spain's 1.4% increase and Portugal’s 2.1% increase. These trends show considerable differences among these three European Monetary Union members, but none of them show strength and all of them show at least sporadic weakness.

In the quarter-to-date, German volumes are down at a 17.6% annual rate, Spanish volumes are down at a 3.6% annual rate, and Portugal’s volumes are up at a 0.4% annual rate underscoring the weakness of retail sales in the second quarter.

Several other European countries report early readings on retail sales as well. In the bottom panel of the table, we show results for Denmark, the U.K., Sweden, and Norway. Each of these countries shows declines in retail sales in May. Norway also shows a decline in April. Denmark and the U.K. show declines in March as well as those declines in May. Skipping over to the three-month rates of growth, Denmark and the U.K. show negative rates of growth over three months while Sweden shows a 1.3% annual rate increase and Norway shows a 3% annual rate of increase. Over six months all these countries show declines and retail volumes decline in the neighborhood of -5.5% to -6% apart from Sweden where retail volumes are down at only a -1.2% annualized rate. Over 12 months all four of these countries show declines in retail volumes, ranging from a decline of 8.3% in Norway to a decline of 2.4% in Sweden.

In the quarter-to-date, three of four of these countries show declining retail sales volumes: U.K. volumes are declining at a 3.6% annual rate, Danish volumes are declining at a 1.6% annual rate, and Norwegian volumes are falling at a 1% annual rate. Only Sweden shows an increase, at a 2.2% annual rate in the unfolding second quarter.

The retail sector has made recovery since COVID struck although looking at the gains since January 2020 we still see motor vehicle registrations are lower than they were at that time by nearly 32%. Total euro area retail volumes are up by 3.7% compared to January 2020. January 2020-to-date covers a period of two-and-a-quarter years, a sizeable span. A gain of 3.7% in sales volumes, even expressed in real terms, is not particularly impressive over that period. Euro area countries in the table do not show impressive results either with German volumes up only 1.2% and Portugal's volumes up 3.2% while Spanish retail volumes since January 2020 are still lower by 3.4%. In the rest of Europe, the retail sectors have improved slightly better. Norway and Sweden have gains of over 7% for the period; Denmark has an increase of 4.2%. Retail volumes in the U.K. are the exception; they are weak with a real retail sales gain of only 1.9% over the last two-and-a-quarter years.

The consumer tends to drive the modern economy. COVID interrupted a lot of consumer spending patterns, shut down the services sector and has coincided with a shift and focus to green energy, a shift that is now partly being unraveled by the Ukraine-Russia war and the need at least for Europe to depend a little bit more heavily on hydrocarbons than they had been planning. The Biden Administration has, so far, refused to backtrack at all on its hydrocarbon policy. It continues to pursue restrictions against oil companies getting financing and has employed a strategy of jawboning oil companies and gas stations to reduce prices but has refused to do things to improve their economic outlook in any way, an action that actually could successfully unlock more supply.

Global spot oil prices have recently fallen below $100 a barrel and that's good news. But it is being portrayed as a decline based on the anticipation of withered demand because of an oncoming recession. That takes a lot of the luster away from the decline in oil prices. However, central banks will take the decline in oil prices however they can get it because they desperately need relief against inflation.

The war in Ukraine continues to raise and spread uncertainties about how the oil market will develop as well as raising questions about other supply issues, particularly regarding food and fertilizer. However, economies are coping. Growth continues to be the order of the day as we've seen in the recent S&P Global composite PMI data, but it's also clear that there is widespread slowing that is in train globally.

The question is whether that slowing will get out of hand and whether it will become recessions or not. It seems to me that the prospect for recession is quite strong and in fact much more likely than what recession-probability models are telling people right now. Formal models that predict oncoming recessions often tend to not predict the recession until it's knocking on the door; thus, making them less-than-helpful exercises in econometrics.

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