Weak retail sales and rising unemployment in Germany are leading to strong concerns over weakness in...
Weak retail sales and rising unemployment in Germany are leading to strong concerns over weakness in the country's consumer spending levels.
Economic indicators from across the eurozone have painted a pessimistic picture in recent months and news from the continent continues to deteriorate.
Germany, despite its past strength, continues to suffer from ongoing economic frailty. Retail sales fell by 0.9% month on month in July, after many economists had predicted they would grow by 1.9%. The poor showing in June represents a 1.7% decrease year on year.
KarlstadtQuelle, Germany's largest department store chain, added to the misery earlier this month by reporting its second-quarter losses had widened and it anticipated no pick-up until next year. Raj Shant, head of European equities at Newton Investment Management, has been zero weight both food & drug and general retailers, over the course of the calendar year. He notes the climate for the sector in Germany has been even worse than for the rest of the eurozone this year.
Shant says: 'The German retail climate is probably the worst in Europe. The HDE, the German retail organisation, has just announced it expects no sales growth in 2003 and a 2.75% drop this year.
'Germany is suffering from rising unemployment. Exports are slowing so companies are not hiring and there is also a situation where interest rates are probably too high for German domestic conditions to justify.'
The number of German workers unemployed has now surpassed the highest level seen in the country in over three years. John Hatherly, head of investment research at M&G, says this weakness has been reflected in estimates for Germany's growth this year, which he feels may still be over-ambitious despite consensus expectations dropping to the 0.4%-0.5% range.
He also points to the poor performance of the large construction sector, a major employer, as a key factor behind the uncomfortably high level of unemployment. Manufacturers too have been hit by a slowing in export demand on the back of global weakness.
Hatherly adds Germany has experienced a number of exogenous shocks this year, which also may explain some of its weakness relative to the rest of the eurozone. Hatherly says: 'The Germans have got an election on 22 September and some of the population have also just experienced a lot of serious floods. The German consumer is more risk averse and has a higher savings ratio, while business confidence is declining too.
'They have also had the one-off introduction of the Euro and there is a discrepancy here. Overall eurozone inflation is 2%, but evidence from surveys of shopkeepers is that many prices were rounded up, which seems to have caused a degree of aggravation.' Shant agrees many retailers, particularly of small ticket day to day items, did in fact take the opportunity to rise prices. He adds this has acted as a hidden inflationary factor eating into consumers disposable income. However, he notes big ticket items, such as cars and computers, continue to fall in price, regardless of what the German public may think.
With little hope of strong sales growth in the retail sector this year, Shant says he will remain zero-weighted the sector until he sees a catalyst for change.
Elections may lead to positive change.
Low official price inflation.
Equity valuations more attractive.
Unemployment at three-year high.
Consumer spending deteriorating.
Sales growth unlikely to recover in 2003.
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