Euro area retail sales surprised on the upside in August as they increased 1.2% m/m and 1.9% y/y. Excluding June, the yearly change was the highest since April 2007.
The increase reflects an increase of 1.5% m/m for the non-food sector, 0.6% for food, drinks and tobacco and 1.7% for automotive fuel. Across countries the rise was broad-based with a strong increase of 2.5% m/m in Germany and 2.3% m/m in Portugal while French and Spanish retail sales increased 1.0% m/m (the figure for Italy has not been released yet).
The increase in retail sales in August followed a decline of 0.4% m/m in June, but the preliminary average for Q3 is much higher than in Q2 and, so far, it seems that private consumption will continue to strengthen in Q3. In Q2, private consumption increased 0.3% q/q, but GDP stagnated partly due to a negative impact from changes in inventories.
The figure shows that private consumption continues to strengthen although the manufacturing sector has been weak recently. The slowdown in manufacturing has been affected by uncertainty related to the Ukraine crisis while the previous currency appreciation has affected the sector with a lag. For the manufacturing sector, we expect stabilisation before a gradual recovery sets in at the end of the year. This should follow as the weakening of the euro should gradually feed through to exports while private consumption continues to be supportive.
The increase in retail sales shows that consumers do not postpone consumption although inflation is very low. During the first part of H1 the ECB argued that low inflation was not seen in consumer behaviour and it still seems to be the case. Nevertheless, there is still a lot of pressure on the ECB for more easing with inflation very close to the deflation limit, high unemployment and survey data continuing lower.
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