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UPDATE 1-Euro zone July retail sales dip, demand still weak

Published 09/03/2009, 06:16 AM
Updated 09/03/2009, 06:18 AM
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(Adds economists' comments)

By Jan Strupczewski

BRUSSELS, Sept 3 (Reuters) - Euro zone retail sales defied expectations of a rebound and fell in July, pulled down mainly by lower sales of food, drinks and tobacco in a sign consumer demand is yet to benefit from any nascent economic recovery.

Retail sales in the 16-country euro area fell 0.2 percent against June and dropped 1.8 percent year-on-year, the European Union's statistical body, Eurostat, said on Thursday. [ID:nBRQ007499].

Economists polled by Reuters had expected a 0.1 percent rise versus the previous month and a 2.2 percent fall year-on-year.

Data on second-quarter euro zone gross domestic product showed household demand contributed 0.1 percentage point to the GDP outcome in April-June, which economists attributed to government cash incentives for changing old cars for new ones.

Some said such schemes may have diverted household funds from smaller-ticket items, negatively affecting retail sales, which do not include car purchases.

"It is likely that the retail sales data modestly understate the current strength of consumer spending in the euro zone as they do not include car sales which have been lifted substantially in a number of countries by 'cash for clunkers' schemes," said Howard Archer, economist at IHS Global Insight.

"It is possible that this is diverting some spending away from retail sales," he said.

Sales of food, drinks and tobacco fell 0.5 percent against June and were 1.8 percent lower than a year earlier.

The euro zone's biggest economy, Germany, which returned to growth in the second quarter, posted a 0.7 percent monthly rise in retail sales.

Economists have raised doubts about the speed and sustainability of any recovery because of high and rising unemployment, which reached 9.5 percent of the workforce in July -- the highest in more than 10 years.

"Doubts and uncertainties remain about the future strength of consumer spending across the euro zone," said Archer.

"High and rising unemployment across the euro zone, muted wage growth over the coming months, the ending of the car scrappage schemes and likely modestly rising inflation before long will likely weigh down on consumer spending," he said.

The data comes just before the European Central Bank is expected to keep its main interest rate at 1.0 percent and present new growth and inflation forecasts amid signs the worst European recession since World War Two may be ending.

"We see the euro zone will show positive GDP growth over the third quarter this year and beyond. The ECB is likely to keep its refinancing rate at 1 percent until the third quarter of next year," said Philip Shaw, economist at Investec. (Reporting by Jan Strupczewski, editing by Mike Peacock)

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