Eurozone retail sales drop more than forecast in April on energy costs

Eurozone retail sales declined more than economists anticipated in April as surging energy prices squeezed household budgets, adding to signs the region's economic recovery is losing momentum.

Eurozone retail sales fell more than expected in April as rising energy costs continued to erode consumer purchasing power, Eurostat data showed Thursday, the latest indicator pointing to weakening domestic demand across the currency bloc.

"The persistent energy price shock is directly hitting household consumption, particularly in lower-income brackets where a larger share of disposable income goes to utilities and fuel," said Bert Colijn, senior eurozone economist at ING Bank.

The decline comes as eurozone industrial producer prices rose 4.9% year-on-year in April, accelerating from 2% in March, with energy costs surging 12.3% annually, according to separate Eurostat data. Brent crude traded near $98 a barrel Wednesday, up from $94.68 late Tuesday, as geopolitical tensions in the Middle East kept energy markets on edge.

Weaker consumer spending complicates the European Central Bank's policy path, as officials weigh the drag from higher energy costs against still-elevated core inflation. Markets will watch the ECB's next meeting for any signal on how the growth-inflation trade-off is shifting.

The retail sales miss follows a string of weak eurozone data. The region's services sector showed signs of strain, with S&P Global's UK services PMI falling to 49.3 in May, slipping into contraction territory for the first time since April 2025. While the UK reading was above the flash estimate of 47.9, it remained well below the long-run survey average of 54.2, reflecting subdued consumer spending in travel, tourism and leisure.

European equity markets reflected the downbeat mood. The CAC 40 in Paris fell 0.5% and the DAX 40 in Frankfurt dropped 1% on Wednesday, as investors weighed the implications of weaker demand against elevated energy costs. The euro edged lower to $1.1616, down from $1.1638 the previous session.

The energy price shock stems largely from heightened geopolitical risks in the Middle East. A fragile ceasefire between Israel and Lebanon appeared increasingly strained, with Iran launching missiles at Kuwait and Bahrain, according to reports. Brent crude's rise above $97 a barrel has reignited inflation concerns across the eurozone, where energy costs are a key driver of headline inflation.

The last time eurozone retail sales surprised to the downside by a similar magnitude was in late 2023, when energy price spikes following the Israel-Hamas conflict pushed the bloc to the brink of recession. Consumer confidence readings in the months that followed took more than two quarters to recover, suggesting the current downturn could persist if energy prices remain elevated.

The ECB faces a difficult balancing act. While weaker consumption argues for monetary easing, the pass-through of energy costs to core prices — producer prices excluding energy rose 2.3% year-on-year in April — limits the scope for aggressive rate cuts. Money markets will be watching for any shift in the ECB's forward guidance at its next policy meeting.

This article is for informational purposes only and does not constitute investment advice.