Weak eurozone retail sales signal ECB rates on hold

Eurozone retail sales turned out much weaker than expected in October, data showed on Wednesday, underlining risks to economic growth next year and supporting views ECB rates would stay on hold for a while. The European Union's statistics office said retail sales in the 13 countries using the euro fell 0.7 percent month-on-month and rose 0.2 percent year-on-year.
Economists had expected a 0.3 percent monthly decline and a gain of 1.3 percent annually. "It does support the view that growth in the fourth quarter will slow down, with consumption being significantly weaker than it was in the summer," said Holger Schmieding, economist at Bank of America.
The European Central Bank meets on interest rates on Thursday amid expectations it would keep the 4.0 percent reference rate unchanged despite a spike in inflation, because of prospects of an economic slowdown.
In further evidence of the fragility of household demand, September's retail sales were revised 0.1 percentage point lower to a 0.2 percent monthly rise and a 1.5 percent annual gain. "Eurozone consumer demand looks like it is imploding right now, raising the stakes for an European Central Bank rate cut sooner rather than later," said David Brown, economist at Bear Stearns.
"Consumers' willingness to buy is receding fast, job insecurity is rising and consumers are diving for cover right now," Brown said. "At very best we would say eurozone growth will slow to 2.0 percent next year, but the odds are rising that the outturn could be much weaker than that."
Sales fell in all eurozone countries in October. The biggest drop came in the bloc's largest economy, Germany, where they dipped 3.3 percent month-on-month. Household demand was the main driver of the eurozone economy in the third quarter, helping it grow by 0.7 percent against the previous three months despite a negative contribution from trade.
But a global credit crunch, dogging financial markets since August, has hit consumer and business confidence through higher market credit costs and is expected to slow growth next year. "Evidence of faltering consumer spending heightens the case for the ECB to hold off from raising interest rates further," said Howard Archer, economist at Global Insight.
"Ultimately though, we believe the ECB's next move will be to trim interest rates as slower eurozone growth and the strong euro dilute underlying inflationary pressures," he said.