Eurozone: Retail sales and inflation point to recession

European Parliament. Committee on Economic and Monetary Affairs, ECON, Hearing. Dialogue on systemic risks in Europe. (EP Audiovisual Services).

European Parliament. Committee on Economic and Monetary Affairs, ECON. Hearing. Dialogue on systemic risks in Europe. (EP Audiovisual Services).

Retail sales in Eurozone point to recession, having lost in September a part of their volume. According to Eurostat, “In September 2013 compared with August 2013, “Food, drinks and tobacco” fell by 0.6% in the euro area and by 0.5% in the EU28. The non-food sector decreased by 0.1% in the euro area, but rose by 0.3% in the EU28”. Retail sales constitute an infallible witness of the juncture in the real economy, because they authentically mirror what happens not only in the consumption sphere but in the investments universe too. This is so because a large part of retail sales is directed to support new economic activities.

In any case, retail trade is tightly bonded with what happens in the world of consumption. Given that this part of GDP accounts to around two-thirds of the total, retail trade sales are early birds showing the way of the things to come. Invariably, GDP statistics are produced with a time lag of at least three months, while retail sales data usually appear with five weeks delay. That’s why, those who follow the short-term developments in an economy, show a great interest on retail sales.

Deflated sales

However, retail trade sales misery coupled with subdued inflation pressures are a rather alarming combination. It was not then by accident, that inflation lost more than one-third of its fading dynamic from September to October this year. Everybody was surprised to see that Eurozone’s inflation rate fell from 1.1% to 0.7% in the brief period of thirty days that is from one month to the next.

So alarmed were the decision makers that the Governing Council of the European Central Bank sidestepped the strong resistance of its two German members and decided to further cut down interest rates. In this way, last Thursday the entire world learned that the basic refinancing interest rate of the ECB was cut from 0.5% to 0.25%. This is like choosing the opposite direction from the Americans. The US Federal Reserve, known as the Fed, is contemplating quite the opposite policy, with interest rates increases and liquidity tidying.

Accurate predictions

This newspaper follows the retail sales developments very closely. On 7 August the European Sting writer Elias Lacon observed that “The latest data from this front are once more on the negative side. According to Eurostat, the EU statistical service, in June 2013 compared with May the volume of retail trade decreased by 0.5% in euro area and by 0.3% in EU27. With this in mind, the widespread opinion powered by some economic analysts, that Eurozone is about to exit from its long recession, must be treated with caution”.

Developments have justified Lacon completely. It was in this same line of thinking that the European Sting writer Dennis Kefalakos on 3 October wrote the following passage: “Draghi also clarified that the next reduction of interest rates is now closer. He revealed that the Governing Council was divided on that (keeping interest rate unchanged) yesterday, which is a clear sign that next month there might be a reduction of the rate to probably 0.25%, from 0.5% now”. The ECB did reduce its main interest rate last week to 0.25% from 0.5%. The driver of that was the fear that Eurozone may be returning to recession after a brief ‘growth’ period of three months. Actually, during the second quarter of this year the GDP increased by 0.3% after three consecutive years of recession and GDP losses.

There is no doubt that retail trade sales is a variable to be closely watched. Most of the time it points to the direction the GDP will follow. Not to forget that Mario Draghi the President of ECB has commented that the growth prospects of Eurozone appear “weak, fragmented and uncertain”.

 

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