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Economy in Brief

Euro Area Retail Sales Fall/Slow, Raising Questions
by Robert Brusca  May 4, 2016

Euro area retail sales fell in March for the first time since October 2015. The 0.5% drop is the largest drop since sales fell by 0.5% in September 2014. That drop proved to a one-off affair and sales thereafter accelerated. In this case, the drop is being taken as a more ominous signal.

Sales fell in March and they are decelerating in terms of their sequential growth rates from 12-month to six-month to three-month. Retail sales sales growth is at a 2.5% pace over 12 months but just at a 0.2% pace over three months. Nonfood sales fell 1.3% in March and also are showing sequential deterioration. Motor vehicle registrations fell in the EU region in March and in February but show a rise over three months. Even so, registrations show deteriorating sequential rates of growth from 12-month to six-month to three-month.

Retailing has been a key sector

This sector is particularly important because it has been the best performing sector in the EU and the EMU. The EU Commission indices have continued to show the retail sector index as having the highest standing relative to its historic survey values of all sectors. Slowing momentum here would be a blow if this slowing were to continue.

Markit Indices

The Markit total PMI index was released today and it shows a small step back for the all-EMU private sector (to 53.0 in April from 53.1 in March). With that, the EMU private sector queue standing fell to the 59th percentile of its historic queue of values. With services at a 65th percentile standing, it is the backbone of strength. Manufacturing at a 59th percentile standing is at a moderate reading. The EMU clearly is still on a growth path and the growth conditions are moderate and not threatened by decline. But retailing has been an important module of strength that may now be fading; that raises questions about future growth since retailing helps to drive the services sector.

GDP, a one-off surprise

The weak retail report is also being taken as a sign that the surprise strength in EMU GDP growth in Q1 will not be repeated and was instead a one-off upside surprise.

Across Europe

Sales volumes dropped in all the early reporting countries in the EMU and the EU in March. Denmark and the U.K. show back-to-back months of decline. Germany shows a drop in March, a flat in February and a skinny 0.1% rise in January. Austria shows two sizable decline in three months but with an even large gain sandwiched in between. There is still sales volatility. But there also are patterns.

The country level sequential patterns show progressive weakness in Germany and Denmark. Norway shows persisting but not necessarily worsening sales declines. Sweden, the U.K. and Austria show three-month sales growth less than 12-month growth. Portugal alone shows a moderate sales growth rate over 12 months with a spurt to a 15.2% pace over three months. It is the only country with a three-month gain stronger than its 12-month gain.

On balance, the retail sales picture is somewhat disturbing but not disheartening. Other gauges show that growth is continuing, but growth is not accelerating and the current rates of growth for sales that seem to be mostly preserved either are low or being eroded slowly. There has been monetary stimulus in train long enough that some results from that should be expected- whether that stimulus is subject to long and variable lags or not. There is some disappointment over that failure.

Markets lose their nerve

Markets over the past two days are having some sort of crisis of confidence with concerns about growth reported to be nagging at the markets and leading to selling. Yet, oil prices have steadied. It is always difficult to know when markets lose momentum and have episodes of selling what is really behind it. Certainly, there is some loss is momentum after Carl Icahn dumped his Apple holdings. But we have seen the EU Commission trim its outlook, but only ever so slightly.

In the U.S., a few Fed members- still far from a majority- have been speaking positively about the prospect of the a rate hike from the Fed coming as soon as June despite still marginal U.S. data. That would include a disappointing ADP report this morning (156K monthly jobs in a closely watched private jobs survey). It remains difficult to puzzle out what the Fed thinks and what that even means when so many Fed members have different paradigms and think different things. And Fed policy does matter to the global economy, as we saw early in the year, when the Fed was ready to give us multiple hikes. Markets may no longer be quite sure where they stand with central banks as rates in some places have crossed into the negative zone and have an uncertain future path. Meanwhile, the growth data show that economic growth is no longer simply breezing along. Question marks are popping up here and there faster than moles in a game of whack-a-mole. And with the Lone Ranger having shot what was perhaps his last silver bullet, there is concern about what happens next.

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