Scorching inflation hits eurozone retail sales in sign of looming recession

Surging inflation eroding Europeans’ living standards is squeezing spending in the bloc, reveal new figures published today.

Retail sales dropped 1.2 per cent in the 19 countries that use the euro in June, down from a 0.4 per cent rise in May, Eurostat said.

The drop, which was worse than analysts’ forecasts, means retail sales contracted in the second quarter.

Germany, the area’s economic powerhouse, suffered one of the sharpest contractions in sales, primarily driven by German consumers being heavily exposed to high energy prices.

Germany imports a large proportion of its gas inventories from Russia, meaning the country has had to scramble to other suppliers due to Moscow slashing gas flows.

A reduction in Russia energy flows into Europe has put upward pressure on prices charged by substitute energy suppliers, causing German and eurozone inflation to sky rocket.

Prices in the bloc are up 8.9 per cent, the highest level since the creation of the euro in 1999.

“Clearly, the large squeeze in real incomes that eurozone consumers are experiencing is starting to bite,” Bert Colijn, senior eurozone economist at Dutch bank ING, said.

Colijn added the summer tourism boom will end soon and domestic consumers are curbing spending after the initial Covid-19 unlocking bounce.

“It is likely that consumption will contract in the coming quarters. That would result in a mild recession in the eurozone,” Colijn said.

A separate survey illustrated the area’s economy may already be in the teeth of a slump.

S&P Global’s composite purchasing managers’ index dropped to 49.9 in July, below the 50 point threshold that divides growth and contraction and down from 52.0 in June. It was the weakest reading since February 2021.

A softening eurozone economy may deter the European Central Bank (ECB) from continuing to hike interest rates steeply despite inflation running at more than four times its two per cent target.

The ECB shocked markets last month by marking its first rate rise in over a decade with a 50 basis points move. Borrowing costs are now zero per cent. They had been negative since 2014.