Europeans spend more as retailers' eyes glitter

By Fergal O'Brien  |   2008-7-4  |     NEWSPAPER EDITION

EUROPEAN retail sales unexpectedly rose in May, rebounding from two months of declines including a record drop in April.

The annual increase of 0.2 percent in euro-area retail sales followed a 3-percent decline in April and a 2.3-percent decrease in March, the European Union's statistics office in Luxembourg said yesterday. Economists expected a 0.7-percent drop in May sales, according to the median forecast of 17 forecasts in a Bloomberg News survey.

The outlook for consumer spending is deteriorating as soaring food and oil prices erode consumer purchasing power, adding to pressure on the overall economy. An index of consumer confidence fell to the lowest in almost five years in June. While economic growth is cooling, the European Central Bank remains focused on taming inflation and increase its benchmark rate to a seven-year high yesterday.

"Despite May's pick-up in retail sales, the prospects for consumer spending do not look good," said Howard Archer, chief European economist at Global Insight in London. "Consumers' purchasing power is being squeezed markedly by elevated energy and food prices," he said, adding that higher interest rates and concerns over the economy are "negatives" for consumption.

Crude oil rose to a record above US$144 a barrel yesterday. Euro-area inflation hit 4 percent in June, twice the ECB's 2-percent ceiling and the highest in more than 16 years.

The euro was little changed against the US dollar, at US$1.5874. It has risen 2.8 percent since ECB President Jean-Claude Trichet said on June 5 that an interest-rate rise in July was "possible."