A sharp drop in German retail sales in December despite heavy pre-Christmas price-cutting yesterday raised fears that weak consumer spending could undermine the fragile upturn in the eurozone's biggest economy.
Sales fell a bigger-than-expected 2.3 per cent month on month after dropping 3.4 per cent in November, as wary consumers clung to their wallets amid mounting job fears and disappointment over tax reforms.
Economists said the "alarmingly weak" retail sales figures underlined Germany's reliance on exports for growth. "Business confidence is high but domestic demand weak," said Mr Julian Callow of Barclays Capital.
German business confidence has risen for nine straight months as the global economic outlook improved. But so far there has been little sign of that optimism feeding through to consumers.
Instead, rising unemployment, growing disappointment over promised tax cuts that have been offset by increased health costs and indirect tax increases have undermined consumer sentiment.
Economists believe a lift in consumer demand will be needed to rescue the recovery as the rapid appreciation of the euro over the last year dents competitiveness and squeezes export demand.
At the moment exports are sustaining businesses, with increasing volumes compensating for declining price competitiveness. But if the euro rises further, as seems likely, firms will have to fall back on domestic demand.
Consumer confidence, however, was unlikely to show much sign of improvement over the next few months, said Mr Rainer Guntermann of Dresdner Kleinwort Wasserstein.
Economists do not expect consumer morale to recover until job prospects improve. But there seems little chance of the labour market picking up while the strong euro intensifies pressure on companies to keep costs down.
Continued weakness of consumer spending and extensive discounting in shops is expected to help drive down inflation faster than the European Central Bank has so far forecast.
That, say economists, could pave the way for a confidence boosting rate cut in coming months.
So far the ECB has shown little inclination to ease rates and is expected to keep them on hold at 2 per cent next week. But policymakers are likely to come under increased US pressure at next weekend's Group of Seven summit in Florida to do more to stimulate the domestic European economy by cutting rates.
Yesterday the dollar turned lower against the euro shedding its earlier gains as profit-taking took hold once the euro avoided decisively falling below a key technical support area, traders said.
The euro was up 0.4 per cent to $1.2461 in trading last night in New York, ending a two-day rally for the US currency. - (Financial Times Service)
