Eurozone Retail Sales Fall Sharply in June

Eurozone Retail Sales Fall Sharply in June

The FINANCIAL -- Retail sales in the eurozone fell more sharply than expected in June, a fresh sign that the currency area's economic recovery remains too weak to quickly bring down very high rates of unemployment, or raise inflation to the European Central Bank's target.

Separately, the final results of surveys of purchasing managers at businesses around the eurozone recorded a slowdown in activity during July, although it was less marked than first estimated, according to Nasdaq.

The European Union's statistics agency said Wednesday retail sales in the 19 countries that use the euro fell 0.6% in June from May, but were up 1.2% from the same month last year. It was the largest month-to-month fall since September 2014. Economists surveyed by The Wall Street Journal had estimated sales fell 0.2%, having seen figures from Germany that recorded a large drop.

Eurostat said sales in Germany were down 2.3% from May. That's a blow to hopes that low unemployment and rising wages in its largest member would boost the recovery in the eurozone as whole, as Germans purchased more goods and services from weaker parts of the currency area.

But the weakness in retail sales wasn't confined to Germany, and is also a setback to the ECB's goal of raising the annual rate of inflation to its target of just under 2%.

Consumer spending has been a driver of growth since oil prices began to fall sharply in the middle of last year. That boosted the amounts that households had available to spend on other goods and services produced in the eurozone.

But with the unemployment still above 11%, any further increase in household spending is likely to be modest, and inflationary pressures weak.

Consumer prices in the eurozone barely rose from a year earlier in July, an indication that the ECB's expanded program of quantitative easing has yet to have its desired effect.

The surveys of purchasing managers underlined the scale of the challenge facing policy makers.

Data firm Markit raised its estimate for the composite Purchasing Managers index--a measure of activity in the manufacturing and services sectors--to 53.9 from 53.7, but that still marked a decline from June's 54.2. A reading below 50 indicates activity is declining, while a reading above that level indicates it is increasing.

The encouraging news for policy makers is that activity continued to grow despite the Greek crisis, which led to a collapse in economic activity in that country during July.

But the surveys also recorded that businesses cut their prices again, if only slightly. As long as that behavior continues, speculation will build that the ECB will have to extend its bond purchases beyond a tentative completion date of September 2016.

Last week, the International Monetary Fund said it expects the inflation rate to remain below the ECB's target of just under 2% through 2020, and that it is likely policy makers will have to expand the stimulus program, which is currently targeted to acquire more than a trillion euros of mostly government bonds by the end of September 2016.