Euro zone retail sales contracted more than expected in November and inflation was negative for the fifth consecutive month in December, adding to the pressure on policymakers to support the economy, although business expectations improved markedly on the news of vaccine approvals.
The flash euro zone annual inflation rate came in at minus 0.3 per cent in December, unchanged from the previous month, official data showed on Thursday.
The reading was lower than the minus 0.2 per cent forecast by economists polled by Reuters and marked an uninterrupted period of negative annual change in consumer prices since July.
The December inflation data will be the most recent available to the European Central Bank at its next monetary policy meeting on January 21. The ECB aims at inflation rates of less than, but close to, 2 per cent over the medium term, a target that has slipped further away in recent months.
Coupled with further strengthening of the euro against the dollar in the autumn, the low inflation rate set the stage for "a dovish performance" by the ECB, said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics.
The fall in prices was driven by weaker growth in the cost of food than in the previous month and the contraction in energy prices. The annual price fall was steepest in Germany, at minus 0.7 per cent.
However, economists expect the euro zone inflation rate to rise in January as Germany reverses a cut in the rate of value added tax.
Retail
The inflation figures were released together with retail sales data for November, which showed a 6.1 per cent drop compared with the previous month, reflecting tightening Covid-19 restrictions in most countries.
The fall was much larger than the 3.4 per cent forecast by economists and it took sales below the level of the corresponding month last year for the first time since the spring.
The largest contraction was in France, where there was an 18 per cent month-on-month drop, reflecting the fact that non-essential stores were closed there earlier than in other countries.
Bert Colijn, senior economist at ING, noted that a 1.8 per cent month-on-month growth in internet sales "indicates that online substitution for main street sales may be smaller than expected".
Germany posted expanding retail sales, as well as strong industrial orders in November, pointing to the resilience of the euro zone’s largest economy before tough coronavirus restrictions were announced in mid-December.
Confidence
Meanwhile, the European Commission's economic sentiment survey, also released on Thursday, showed sentiment picking up in December, a shift driven by Covid-19 vaccine approvals across Europe.
Overall confidence, which takes into account past and future business conditions, increased the most among manufacturers and consumers. Manufacturers reported more positive views on export orders and production expectations, while consumers were more upbeat on both past and future financial household financial conditions.
In the service sector, which has borne the brunt of restrictions introduced during the pandemic, sentiment worsened slightly.
Jack Allen-Reynolds, senior Europe economist at Capital Economics, said that Thursday's data was better than in the spring, pointing to a less severe economic contraction in the final quarter than in the second.
However, he added that “the recent extensions of strict lockdowns increase the chance that the economy will stagnate or even contract in Q1”. - Copyright The Financial Times Limited 2021
