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By Darren Ennis
BRUSSELS, July 3 (Reuters) - Euro zone retail sales fell further than expected in May, data showed on Friday, dampening hopes that an improvement in consumer spending might ease the recession.
Retail sales in the 16-country currency area fell 0.4 percent month-on-month, the European Union statistics office said, worse than the 0.1 percent drop expected by economists in a Reuters poll.
Sales fell 3.3 percent year-on-year, while analysts had expected a 2.7 percent decrease.
The data, which came a day after the European Central Bank kept euro zone interest rates steady at 1.0 percent, showed consumer demand continued to suffer from the worst recession since World War Two.
"There was further confirmation today, if any were needed, that domestic demand is not set to ride to the rescue of the euro area economy any time soon," Colin Ellis, economist at Daiwa Securities, said.
Nick Kounis of Fortis bank said: "These figures are a little surprising especially after good German numbers earlier in the week. One of the trends that we are seeing is strong car sales and these figures don't include car sales."
German retail sales rose for a third consecutive month in May, gaining 0.4 percent on low inflation-spurred demand.
"Now that there are some sorts of support measures from governments like extra child benefits in Germany, or the reduction in VAT for restaurants, consumption in total may benefit ... but overall the outlook for consumption remains quite weak," Citigroup's Juergen Michels said.
ECB PLAN B?
Eurostat revised down its retail trade figures for April to a rise of 0.1 percent month-on-month and a fall of 2.5 percent annually from the previous readings of plus 0.2 percent and minus 2.3 percent, further illustrating recent cautious outlooks given by some of Europe's top retailers. Euro zone retail sales had inched up month-on-month for the first time in five months in April and their annual decline was lower than expected.
Most large European retailers, such as Carrefour, Tesco and Marks and Spencer, have been reporting signs that consumer confidence is stabilising, but there has been little indication that spending is picking up.
Carrefour, Europe's No. 1 retailer, announced in June its third profit warning in 12 months, underscoring a tough year ahead for the industry despite a rally in retail stocks on hopes of a recovery.
Sales of non-food products in the euro zone in May dropped 0.6 percent month-on-month and 3.4 percent year-on-year despite good weather, which normally boosts consumer spending.
Eurostat said food, drink and tobacco sales increased 0.2 percent on the month, but fell 1.7 percent from a year earlier.
Retail sales are an indication of household demand, under pressure from rising unemployment due to factory closures and lay-offs. Joblessness in the euro zone rose in May to 9.5 percent, its highest in 10 years.
"More fundamentally, regardless of whether firms cut costs by shedding jobs or cutting hours, that still represents a fall in aggregate household income across the economy as a whole," said Daiwa's Ellis.
"Essentially, we find ourselves coming back to the same question as yesterday -- does the ECB have a plan B if its current actions fail to revive domestic demand?" (Additional reporting by Bate Felix in Brussels and Mark Potter in London; Editing by Dale Hudson)