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German Retail Sales Rose in January After Tax Cuts (Update1)

German Retail Sales Rose in January After Tax Cuts

March 2 (Bloomberg) -- Retail sales in Germany, Europe's largest economy, rose the most in seven months in January as tax cuts starting this year boosted incomes and consumer confidence.

Sales, adjusted for seasonal swings and the number of shopping days, rose 2.1 percent from December after two monthly declines, the Federal Statistics Office in Wiesbaden said today. Economists had expected a gain of 0.6 percent, the median of 17 forecasts in a Bloomberg survey showed. From a year earlier, retail sales fell 0.4 percent, the office said.

Tax cuts worth 6.5 billion euros ($8.6 billion), coupled with the cheapest borrowing costs in six decades, helped push consumer confidence to an 11-month high in February, suggesting consumption may grow this year after three years of stagnation. Rising unemployment is tempering the outlook for growth in retail sales.

``It's a pleasant surprise that the numbers are stronger than expected,' said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. ``But the conditions for consumption aren't that good. Household spending won't be a big motor for growth this year.'

Unemployment reached postwar records in the first two months of the year, with the jobless rate climbing to 11.7 percent, the Federal Labor Agency reported yesterday. Medion AG, a German distributor of discount electronics and computer products, this week said fourth-quarter sales dropped, led by a decline in revenue in its home market.

Not Kicking In

``We've been experiencing since the third and fourth quarter that the domestic growth forces aren't kicking in as they did in earlier recoveries,' German Economy and Labor Minister Wolfgang Clement said yesterday. ``We have to react to that and must strengthen public and private investments as much as we can.'

German growth will probably slow to 1 percent this year, from 1.6 percent in 2004, after the economy shrank at the end of last year, government adviser Bert Ruerup said in an interview this week. With companies such as Deutsche Bank AG and Miele & Cie KG, a 105-year-old maker of household appliances, still cutting jobs, the outlook for employment remains bleak.

``Companies will stay very reserved about hiring,' said Dirk Faltin, an economist at Stone & McCarthy Research in London. ``Unemployment will basically stagnate at a very high level.'

The government still expects growth of 1.6 percent this year, Clement said, after it lowered the top income tax rate to 42 percent from 45 percent and the bottom rate to 15 percent from 16 percent. Disposable incomes grew in 2004, Bundesbank figures show.

ECB Rate Decision

To support investment and consumption, the European Central Bank will probably keep its main lending rate at 2 percent for a 22nd month tomorrow, said all 34 economists polled by Bloomberg. ECB council member Nout Wellink said last week he's more concerned about growth than about inflation at the moment.

The inflation rate in the 12 euro countries fell below the ECB's 2 percent limit in January for the first time in 10 months, increasing scope for the bank to keep rates on hold and leaving shoppers with more money to spend.

Fielmann AG, Germany's largest chain of eyeglass stores, said last week demand will recover ``significantly' this year, after profit and sales last year slumped. And Gerry Weber AG, Germany's third-largest women's-clothing maker, said it aims to increase sales by 10 percent and boost profitability this fiscal year.

``Consumption should slowly pick up,' Stone & McCarthy's Faltin said. ``There has to be pent-up demand. But the unemployment numbers put a limit on what we can expect from a recovery.'


LINK: http://www.bloomberg.com/apps/news?pid=10000100&sid=aKCV7dVLNoRY&refer=germany