Tuesday, April 29, 2008

European Retail Sales Slumped in April

European Retail Sales Slumped in April, PMI Shows

By Jurjen van de Pol

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European retail sales dropped the most in more than four years in April as rising fuel and food prices squeezed shoppers' budgets, the Bloomberg purchasing managers index showed.

The measure of sales growth in the euro region declined for a second month to a seasonally adjusted 41.8 from 48.2 in March. A reading below 50 indicates contraction. The index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd., is at the lowest level since its introduction in January 2004. Sales also fell from a year earlier.

The fastest inflation in 16 years is squeezing retailers' margins and weighing on consumer spending while at the same time discouraging the European Central Bank from cutting interest rates. The European Commission yesterday cut its forecasts for economic growth this year and next in the 15-nation euro region.

“Rising inflation is hitting households' purchasing power and is undoing some of the positive stimulus, such as strong employment growth and rising wages,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. “The dilemma facing the ECB just gets worse.''

The euro fell almost half a cent after the retail sales report before recovering to trade at $1.5576 at 1:10 p.m. in Frankfurt.

Carrefour, Ikea Warning

Carrefour SA, the world's second-biggest retailer, and Ikea, the largest home-furnishings seller, said the industry is likely to suffer as global economic growth slows and commodity prices soar. Consumer companies have “never before faced so many challenges,'' Carrefour chief Jose Luis Duran said earlier this month at the World Retail Conference in Barcelona, Spain.

Sales fell across all three of the largest economies in the euro zone, led by Italy, where retail spending dropped at the fastest rate in the survey's history. In Germany, sales fell the most in three months, while in France they declined the most since January 2006.

“Italian indicators have been on a predictable and steady downward trend for the past year,'' said Morgan Stanley economist Vladimir Pillonca, who predicts Italy may be the first and only country in the euro region to enter into a recession this year.

Praktiker AG, Germany's second-largest home-improvement retailer, said April 23 that its first-quarter loss widened on weaker demand. Chief Executive Officer Wolfgang Werner said “the first three months were very bad in domestic sales.''

Sarkozy's Plan

Metro AG, Germany's largest retailer, today reported first- quarter operating profit increased about 14 percent as growth in Eastern Europe offset slowing sales at home.

While “rising real wages and rising employment will have a positive impact on Metro's German business,'' the dynamic in Western Europe “leaves something to be desired,'' Chief Executive Officer Eckhard Cordes said in a Bloomberg Television interview.

In France, “inflation and the end of the rise in real-estate prices, and of the ability to take on loans, are weighing on consumption,'' said Yann Lepape, an economist at Oddo & Cie. in Paris. “The trend is starting to go downward.''

French President Nicolas Sarkozy yesterday outlined measures to spur growth, including a push for price rebates at retailers, as accelerating inflation hurts consumer spending in the euro region's second-largest economy.

“Prices in supermarkets have increased more in France than in almost all other European countries,'' Sarkozy said last week in a nationally televised interview from the presidential palace. “That's not normal.''

Margins Shrink

Gross margins fell in April at the fastest rate in the survey's history as purchasing prices in Germany and Italy rose and sales missed targets to the second-largest extent on record, NTC said.

European consumer confidence fell to the lowest in more than two years in March, according to the European Commission. The commission yesterday forecast the euro-region economy will expand 1.7 percent this year and 1.5 percent in 2009, which would be the slowest since 2003. Last year it grew 2.6 percent.

By contrast, the International Monetary Fund predicts the U.S. economy will expand just 0.5 percent this year and 0.6 percent in 2009 amid a housing recession.

Defaults on U.S. subprime mortgages have caused about $309 billion in writedowns and losses at the world's biggest banks and financial institutions so far and pushed up borrowing costs globally.

ECB's Inflation Fight

While the Federal Reserve has lowered interest rates to bolster its economy, the ECB has left its benchmark rate at a six- year high of 4 percent to fight inflation.

NTC said a gauge of expected sales for the coming month increased to 59.1 from 53.3 in March, partly because food and drink retailers plan to raise prices.

Nestle SA, the world's largest food company, last week said first-quarter sales rose 6 percent after increasing prices by the most in a decade for products from Nescafe coffee to KitKat chocolate bars.

For the Bloomberg retail indicator, NTC recruited a panel of companies in Germany, France and Italy, which together make up around 75 percent of total euro-area retail sales by value. The panel includes large chain retailers as well as smaller stores.

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