By Marcin Grajewski
BRUSSELS, June 4 (Reuters) - Euro zone retail sales inched up month-on-month for the first time in five months in April and their annual decline was lower than expected, but analysts said the economic outlook was bleak despite recent signs of improvement.
Retail sales in the 16 countries using the euro rose 0.2 percent from March, the European Union statistics office said, matching the expectations of economists polled by Reuters.
Sales fell 2.3 percent year-on-year, while analysts had expected a 3.2 percent decrease.
The data, reported as the European Central Bank meets to discuss monetary policy, signalled consumer demand was faring better than expected despite the worst recession since World War Two, but any significant improvement may still be far away.
"I think that going forward, we should not expect too much of an improvement in consumer spending. Consumers still have a lot of bad news from the labour market," said Nick Kounis, analyst at Fortis.
Jennifer Mckeown of Capital Economics said: "April's small rise in euro zone retail sales does little to change the underlying picture of weak consumer spending."
Eurostat also sharply revised up its retail trade figures for March to -0.1 percent month-on-month and -3.4 percent annually from the previous readings of -0.6 percent and -4.2 percent.
Data showed on Wednesday that the euro zone's dominant service sector shrank at a slower pace in May while Australia reported first-quarter growth, strengthening the case that the worst of the global recession is over.
Britain's service sector also improved, returning to growth in May and delivering its most optimistic outlook since October 2007.
Retail sales are an indication of household demand, under pressure from rising unemployment due to factory closures and lay-offs. The April jobless rate for the euro zone hit its highest level in nearly 10 years at 9.2 percent.
Eurostat said food, drink and tobacco sales increased by a robust 1.1 percent on the month while trade in non-food products, except for automotive fuels, shrank 0.2 percent.
The corresponding annual figures were -1.2 percent and -2.5 percent.
Analysts say forthcoming months of falling prices -- they stopped growing in May for the first time -- would boost people's purchasing power and provide an argument for ECB monetary easing.
"On the positive side for consumer spending, euro zone consumer confidence has risen from the record lows seen earlier this year and purchasing power is being boosted by sharply lower inflation," said Howard Archer, chief European economist at IHS Global Insight.
At its Thursday meeting, the ECB is set to keep its main interest rate on hold at 1.0 percent, with markets keen to see the details of its covered bond purchase plan as well as clues on whether rates may yet be cut further. (Editing by Dale Hudson and Andy Bruce)