Eurozone Retail Sales Soften as Shoppers Feel Energy Pinch -- 2nd Update

By Don Nico Forbes

Eurozone retail sales slipped in March as the war in Iran drove fuel prices higher, while falling consumer sentiment points to a broader weakening of demand in the sector over coming months.

Volumes were down 0.1% on month compared with a 0.3% decline in February, the European Union's statistics agency said Thursday. This fell short of a consensus of economists polled by The Wall Street Journal, which expected a rise of 0.1%.

The unexpected decline was driven by the largest fall in automotive-fuel sales since August 2023, as the outbreak of war in Iran sent petrol and diesel prices sky-rocketing across the eurozone.

But the data for March is unlikely to capture the full extent of the energy-price shock.

"Right now, it doesn't feel like there has been a significant change in European demand," Adam Cochrane, a European retail analyst at Deutsche Bank Research, said.

"This isn't like 2022, when there was a rapid...change in demand. Consumers seem a bit more prepared this time."

While consumers faced a prompt rise in prices at the pump after attacks on Iran by the U.S. and Israel in late February, the squeeze on disposable income is expected to ramp up further in the coming months, which could weigh heavily on retail demand.

Consumer confidence in the eurozone has plunged in recent months, hitting its lowest level since December 2022 in April as higher energy prices revived inflation fears across the currency area.

However, while consumer confidence tends to react quickly to shocks, spending adjusts more slowly, according to Riccardo Marcelli Fabiani, senior economist at Oxford Economics.

"The more meaningful takeaway is a few months ahead. Over a three- to six-month horizon following the shock, the outlook is not very good," he said.

The eurozone retail sector could start to feel the strain from April, when annual inflation picked up faster than expected to 3%, from 1.9% in February, the last month before the war. The European Central Bank--which sees consumer demand as central to economic growth--has said limiting second-round effects of higher energy prices remains its top priority.

Such effects could start to be felt in the coming months, as energy prices feed through to business costs and fertilizer shortages drive up food prices, said Vera Jotanovic, chief economist at European retail and wholesale group Eurocommerce.

"What we are fearing is the combination of shocks: energy, food, and broader inflation all hitting at once," she said.

Spending so far has been supported by a relatively healthy labor market, with unemployment in the eurozone close to record lows. Still, this could reverse if hiring slows or jobs face the axe due to lingering uncertainty, while the ECB already expects wage growth to cool this year.

Retailers are already feeling the pinch. Swedish clothing giant H&M recently cited risks to demand stemming from the war. And on Wednesday, German online retailer Zalando posted earnings before interest and taxes that fell short of expectations.

"The results raise questions regarding the resilience of European consumer demand in the face of elevated oil prices," Stifel's Clement Genelot said in a note.

Oil prices fell sharply on Wednesday on rising hopes of a peace deal between the U.S. and Iran, offering a potential respite for weary consumers. But uncertainty remains high, with economists concerned that persistent energy shocks might have already left lasting scars on demand in the eurozone.

After five years of geopolitical and economic crises, this year was expected to provide a respite for consumers, Eurocommerce's Jotanovic said.

"2026 was supposed to be a recovery year for retail. That recovery is now at risk."

Write to Don Nico Forbes at [e-mail]

(END) Dow Jones Newswires

05-07-26 0631ET