- Soaring German retail sales reflect a wider recovery of eurozone consumer spending …
- … fuelled by the fall in energy prices, a slow labour market recovery and easing financial conditions
- Meanwhile, its too early to say that oil prices have turned, though we do expect a rise later in the year
German retail sales soar …
The volume of German retail sales jumped by 2.9% mom in January. This was the fourth consecutive monthly rise and it followed a 0.6% increase in December (revised upwards from 0.2%). The yoy growth rate increased to 5.3% in January from 4.8% in December, reaching its highest level since June 2010. The detailed data show that the strength in sales was broad-based, with sales of food, drink and tobacco rising by 3.8% yoy in January and non-food sales rising by 6.3%.
… reflecting a wider recovery in eurozone consumption
The German economy is amongst the eurozone countries that are expected to grow the most this year. Still, we think the strength of German retail sales and private consumption in general reflects a broader trend within the eurozone. An important driving factor behind this recovery is the drop in oil prices since the summer of last year. Although oil prices have bottomed out recently (see below), they will continue to have an upward impact on consumption for a while, as changes in energy prices work their way through the economy with a delay.
Gradual labour market recovery continues …
Another factor behind the recovery in consumption is the gradual rise in employment. The number of jobs has been increasing in each quarter since 2013Q2, albeit moderately. The employment component of the composite PMI (at 51.8 in February – the highest since August 2011) signals further rises in employment in the coming quarters. Meanwhile, the unemployment rate has slowly declined from its peak level of 12% in the middle of 2013 to 11.2% in January of this year.
…while financial conditions ease
Finally, consumption is supported by easing financial conditions. Interest rates have fallen to low levels, while eurozone banks have been easing credit standards on consumer credit in every quarter since 2014Q1. Furthermore, since 2014Q1, banks have reported rising demand for consumer credit in every quarter. Finally, household wealth has been lifted by a sharp rise in equity prices in recent months.
Oil prices have recovered, but too early to call turn
Oil prices have regained some traction over recent weeks, but we think it is too early to talk about a definitive turning point. Oversupply is still an issue, and this caps the upside potential for oil prices. Normalisation of the supply – demand balance is not expected before the second half of the year. In fact, up until now, US crude production has continued to rise, and the total production of the OPEC countries does not appear to have changed.
New dip still possible in the near term
Oil prices could come under pressure again as soon as oil demand for storage diminishes or if oil production exceeds expectations (which would automatically translate into a rise in inventories). A new test of the 2008 lows (USD 40-45 range), can therefore not yet be excluded .
Recovery seen later in the year
We expect oil prices to start to recover on a more sustained basis later in the year as the supply-demand balance starts to adjust. The dampening effect of low prices on oil production will start to come through, while the positive effects in boosting demand will become increasingly visible in the economic data. We expect Brent oil prices to end this year at around USD 65 and to average USD 75 in 2016.