German retail sales suffer biggest fall since 1994

German retail sales suffered their fastest drop in almost 30 years and eurozone factories went into reverse as bills rise for customers and manufacturers.

Turnover at German shops plunged 8.8pc in real terms in June compared with the same month a year earlier, according to the Federal Statistical Office, the steepest drop since records began in 1994. Annual inflation hit 8.2pc in June and 8.5pc in July.

It comes as factories in the big four eurozone economies went into reverse as surging inflation and rising energy bills hammered manufacturers and their customers.

Italy, which is particularly heavily exposed to Russian energy supplies, led the downturn according to S&P Global’s purchasing managers’ index (PMI) survey of businesses in July.

Its index score fell to 48.5 last month, its lowest since the first wave of the pandemic in 2020. Any score of below 50 shows activity in the private sector is falling.

Spain’s PMI fell to 48.7, Germany’s to 49.3 and France’s to 49.5.

Britain’s manufacturers are proving slightly more resilient, with the PMI of 52.1 pointing to modest growth in the month.

Components from chemicals and electronics to metals, timber and energy are all becoming more expensive, the survey found.

The index for output indicated a slip in production while new orders fell, amid falling demand from the eurozone, US and China - although factories took on more staff which suggests a degree of optimism.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said “eurozone manufacturing is sinking into an increasingly steep downturn, adding to the region’s recession risks”.

“The energy crisis adds to the risks that not only will weaker demand and destocking cause manufacturing production to decline at an increased rate in the coming months, but reduced energy supply will act as an additional drag on the sector,” he said.

Gabriella Dickens at Pantheon Macroeconomics said British businesses may struggle to keep on rising costs to passing costs to customers.

She said: “For now, manufacturers still are passing on higher costs to customers - the output price index remained in the top 5pc of previous readings in July, despite edging down to a 14-month low.

“But the fact that manufacturers now appear to be carrying excess stock suggests output price inflation will fall sharply soon. The sharp fall in most commodity prices, including industrial metals, over the last two months should weigh on output price inflation too.”

Martin Beck, chief economic adviser to the EY Item Club, said this will reduce pressure on the Bank of England to raise interest rates.

He expects “output price inflation to continue to cool over the remainder of 2022, which should mean that the need to continue to tighten monetary policy reduces.”

“So, unless the MPC signals a move to a much more aggressive approach on Thursday, the EY Item Club sees Bank Rate reaching 2pc by the end of 2022, rather than the much higher level currently implied by market pricing,” he said. Financial markets currently expect the base rate to rise from 1.25pc now to 2.75pc by the early months of 2023.