Across the Euro region, retail sales are up — way up. In fact, retail sales are currently the most robust we’ve seen in about 20 months’ time.
One standard measure of retail sales is based on surveys of purchasing managers for retail outfits, and the data is adjusted for seasonal effects and analyzed by Bloomberg LP by NTC Research Ltd.
According to this scale, any reading over 50 indicates economic growth. The dozen nations’ retail sales in August came in at 51.9. Based on the result, the OECD has increased its forecast for EU growth in 2005.
Sounds like great news, but I like to look a little deeper before throwing the confetti.
When you look between the lines of this good news report, you can see that the new retail surge was supported by substantial reductions in retail prices. The price cuts were so significant, in fact, that while sales are up, profits are down. It seems pretty clear to me that increased sales that lead to a decrease in profits are nothing to get too excited about.
“The price of oil is a big problem… [that] directly influence[s] what consumers are paying for gas, electricity, and transportation, explained Italian grocery store giant Coop Nazionale’s vice-chairman, Enrico Migliavacca. “In the last week of the month,” he added, “[consumers’] money runs out and spending dries up.”
“We can’t count on any notable revival in the second half now because of what’s happened on energy markets,” lamented Bayerische Landesbank Chief Economist Juergen Pfister.
And he’s right. Even with retail sales up, lower price points at the registers and higher energy costs for transportation and manufacturing can only cut into retailers profits further — the one month of increased sales that the OECD has extrapolated into an estimate for stronger growth ahead isn’t enough to turn the EU economy around just yet.
Call me a pessimist if you like, but, for me, a month of lower profits despite higher sales is no reason to celebrate. The European Union might be able to overcome quarter upon quarter of slowdowns, but not yet… not now.