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FEBRUARY 16, 2004
Europe's Shoppers Take A Holiday Weak retail sales threaten the Continent's fragile recovery It's 6 p.m. on a mild February Monday, and plenty of people are out in the Main-Taunus Zentrum, a retail mall just outside Frankfurt. But few of them are spending much money. "We'd really like some new bedroom furniture," says Karin Beckmann, an industrial chemist who is eyeing wardrobes in the Karstadt department store. "But my husband's worried about losing his job, so we probably won't get anything just now." Millions of other Germans are equally reluctant to buy. Retail sales in Europe's biggest and sickest economy tumbled 1.8% in November from the previous month, 2.3% in December -- and probably fell yet again last month: Handelsverband BAG, a retailers' association in Berlin, predicts a year-over-year drop of 4% to 5% in January. "It was an icy start to 2004 for consumers," says Klaus L. Wübbenhorst, chairman of GfK, a consumer and market research company in Nuremberg. Things aren't much better elsewhere on the Continent. Dutch, Italian, and Austrian consumers have all tightened their belts in recent months. Retail sales barely rose at all in the euro zone as a whole last year. Even in France, where the average household spending on manufactured goods edged ahead by 1.8%, consumers are showing signs of renewed caution. New-car sales in France were down a massive 11.9% in January from the previous year. "Job insecurity means that people like me have become thriftier," says Marie-Charlotte Mengin, a banking executive browsing the makeup section of Monoprix, the mass-market retailer, on the Champs-Elysées in Paris. Mengin should know. She was unemployed until two months ago. ACHILLES' HEEL. Feeble consumer demand is beginning to look like a blight across the Continent. Year-to-year sales at Germany's KarstadtQuelle department store chain have dived so badly -- by 6.8% in the final quarter of 2003 -- that Chief Executive Wolfgang Urban tore up his earnings forecast for the year as a whole. At France's Pinault-Printemps-Redoute, domestic sales slumped 12.2% in the fourth quarter, and CEO Serge Weinberg now says he will focus future investments outside of France, particularly in Brazil and Thailand. Not surprisingly, weak consumption is also hitting manufacturers and service industries such as advertising. Lackluster demand could thus imperil the euro zone's fragile recovery. "Low consumption could undermine the expected upturn," says Andreas Cors, a business-cycle specialist at the German Institute for Economic Research in Berlin. "It could prove the economy's Achilles' heel." Without a retail revival, euro-zone growth could be held to 1.8% or lower this year. That compares with forecasted growth of 5.2% in the U.S. and 3% in Britain, where consumers have been on a roll. What growth Europe manages to realize will be driven primarily by exports, which are expected to increase by 4.6% this year. If the strong euro blunts European competitiveness and cuts into sales abroad, domestic demand won't be strong enough to take up the slack. The result: Companies will have to cut production, their profits will fall -- and the economy will start to slow again. Ironically, the gloomy news on the consumption front comes just as manufacturing in the euro zone is picking up at its fastest clip for three years. Reuters Eurozone Manufacturing PMI data released on Feb. 2 show that output has risen for five months running and that the pace of expansion is accelerating. Business confidence is also increasing -- most notably in Germany, where it rose in January for the ninth month in succession on the back of strong export demand. In the fourth quarter of 2003, capital expenditure rose an estimated 2.1% from the previous year and is forecast to rise 2.3% in 2004. But this enthusiasm shows no sign of feeding through to consumers. A new European Commission survey shows that consumer confidence across the euro zone stagnated in January. Many economists fret that consumer caution could start sapping business optimism. "My worry is that business confidence takes a hit before consumer confidence picks up," says Phyllis Papadavid, European economist at Lehman Brothers Inc. (LEH ) in London. Euro-zone workers have less disposable income than their freewheeling U.S. counterparts. They earn less and pay more in taxes. They are also more inclined to save -- and less inclined to borrow to finance big-ticket items. Even so, euro-zone retail sales should be rising at this stage in the economic cycle. One reason they aren't is that too many consumers, like Karin Beckmann's husband, are worried about their jobs. Although unemployment fell slightly in December, 8.8% of Europe's labor force is out of work -- almost 12.3 million people. And economists warn that the December dip -- 16,000 fewer people were without jobs -- is probably the result of changes in German rules governing who can claim unemployment benefits rather than a strengthening of the job market. Joblessness in France actually edged higher in December, to 9.7%. "Consumers are very uneasy," says KarstadtQuelle's Urban. CONFUSING REFORMS. Europeans also are afraid of spending in the face of controversial and confusing social security, tax, and pension reforms on the agenda in several countries. Take Germany: The government will pump $11.2 billion more than expected into the economy this year by bringing forward tax cuts due to take effect next year. But that's still half the cut it originally planned. Meanwhile, Germans are paying more for health care and other social benefits. "I really don't know if I'm going to be better off or not over the year," says Stefan Blanke, a Frankfurt banking executive. It would help if politicians stopped confusing consumers by repeatedly changing policies, asserts GfK's Wübbenhorst. The best recipe to restart spending, he argues, is to lower taxes definitively, clarify social security reform, and improve labor market flexibility to make it easier to create jobs. Other economists say that the European Central Bank should cut its key interest rate, which at 2% is twice as high as the U.S. federal funds rate. That would encourage Europeans to save less and borrow more. German Economics & Labor Minister Wolfgang Clement counters that tax cuts will soon have the desired effect. "Pent-up demand will work through the system and drive the economy," he says. If he's right, a surge in German consumer demand will give some lift to the euro-zone economy. Germany accounts for 30% of euro-zone gross domestic product. Most consumption specialists are skeptical, however. "There's no improvement in sight," says Handelsverband BAG Director Johann Hellwege. "Minister Clement's claims to the contrary are no more than wishful thinking." At this point, every retailer in Europe hopes Minister Clement is right.  By David Fairlamb, with Jack Ewing and Gail Edmondson in Frankfurt and Rachel Tiplady in Paris
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