Gertrude Tumpel-Gugerell: Retail sales from a euro area perspective
Speech by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European
Central Bank, at the World Retail Congress, Berlin, 25 October 2010.
* * *
It is a great pleasure for me to be here in Berlin today at the World Retail Congress.
Retail sales constitute about 45 percent of private consumption, which in turn amounts to a
share of almost 60% of GDP. Thus, retail sales alone explain around 30 percent of
aggregate demand in the euro area.
These impressive figures are enough to underline the importance of the retail sector for the
overall economy. As you know, the primary objective of the ECB's monetary policy is to
maintain price stability. The Governing Council of the ECB aims at keeping inflation rates
below, but close to, 2% over the medium term. In order to reach this objective we must
assess the inflation outlook continuously.
We form our view on future inflation by closely following and monitoring a wide range of
indicators that affect inflation and the economy's output of goods and services. Retail sales is
one of those indicators and certainly - as the figures above show - an important one.
In my presentation I would like to briefly touch on three questions:
1. How was the retail trade sector affected by the crisis?
2. How do - in general - financial variables and monetary policy affect private
consumption and retail trade?
3. And, what is - in our view - the future outlook for the retail trade sector?
Let me turn to the first question on how sales in retail shops and stores were affected by the
crisis.
In Chart 1 you see the annual rate of change in the volume of euro area retail sales
alongside with private consumption and GDP. You see that retail sales move clearly in
tandem with private consumption and GDP. As GDP and consumption declined in the recent
recession, so did retail sales. During the crisis, households drew back on consumption,
hence private consumption growth slowed down on the basis of lower growth in incomes,
reflecting mainly weak employment growth.
We can see in Chart 2 that the low growth in real disposable income was mainly driven by
the decline in overall employment. Real compensation per employee, in contrast, contributed
positively in 2009 - mainly due to the low inflation rates during that time - before stagnating
again in the beginning of this year. In addition, financial wealth declined in 2008, thereby
further depressing consumption growth.
Another key determinant of aggregate demand are consumers' expectations. Chart 3 gives
additional evidence on how consumers' expectations and confidence declined in parallel with
private consumption during the recession period. More recently, consumer confidence has
increased while the indicator on major purchases, which is an indicator for durable goods
consumption, has declined reaching a record low level.
Let me now turn to the second question: How do financial variables and monetary policy
affect private consumption decisions and retail trade?
Loans to households, whose developments are presented in Chart 4, are an important
indicator for the analysis of consumer spending. Hence, the ECB regularly monitors
household loans as they are a key channel for the transmission of monetary policy.
Allow me to elaborate a little bit more on this point. Loan developments in the euro area can
be explained by their main determinants, such as house prices, various interest rates and
real income. In line with this, we saw that the annual growth rate of loans to households -
after some months in negative territory - has turned positive towards the end of 2009 and
since then has continued to increase steadily [ last observation: 2.9% in August 2010]. This
positive annual growth of loans to households reflects mainly developments in lending for
house purchase. Loans for consumer credit are still contributing negatively to overall loan
growth. These latest developments in loans to households confirm the broad consistency
with business cycle regularities, which suggest that the turning point in the growth of loans to
households takes place early in the economic cycle.
The loan development needs to be seen in the context of the current low level of interest
rates. Indeed, bank lending rates for loans to households for house purchase declined further
in the second quarter of 2010 - still to a lesser extent than in the previous quarters. The
levels of lending rates for loans to households we are currently seeing are comparable to the
levels observed in 2005. For shorter-term maturities, the interest rates are even lower than in
2005. Still, at the same time, the net percentage of banks reporting a tightening of credit
standards for loans to households remained unchanged in the second quarter of 2010,
compared with the previous quarter. Overall, we can see that the ECB's monetary policy
since the onset of the financial crisis has been very much supporting private consumption
demand, and thereby retail sales, while keeping a clear orientation to preserve price stability
in the medium term.
During the crisis also fiscal policy was used to stabilise consumers spending and retail sales.
This raised obviously the question on whether fiscal policy in a period of recession should
take a more forceful orientation to stimulate consumption or a more prudent approach to
discretionary fiscal policy making. In my view, while the operation of automatic stabilisers,
whose impact on activity, income distribution and the sustainability of public finances is
reasonably well understood and comparatively easy to predict, discretionary changes -
particularly if they are temporary - have mostly a short-living effect on demand. The
carscrapping schemes implemented in several countries are a good example. Schemes geared
towards car purchases certainly stimulated demand in a period of high uncertainty. But such
influence has not affected the underlying trend of demand of automobiles.
In which shows the level of car registrations in the euro area, Germany and Spain
Chart 5,
illustrates that indeed car sales have benefited initially from these schemes. However, it is
also visible that the increase of demand for cars was mostly an anticipation of future
demand. It may however have contributed to the swift recovery of the industry.
So far I discussed the main determinants of private consumption demand on a euro area
aggregate level. Let me, however, also mention that the aggregate developments in the area
mask heterogeneous and even divergent changes in different member countries that have
been subject to shocks of a diverse nature. Chart 6 shows that, while the downturn of retail
trade was a common feature of most euro area countries, there were significant differences
across countries between the levels of retail sales in 2010Q2 compared with the time just
before the financial crisis in the autumn of 2008. Although it is clear that retail sales have
contracted in most countries, it is also clear that differences across countries are quite
significant. [ The volume of retail trade in Greece, for instance, stood almost 20% below its
level in 2008Q2, which compares with a fall of 2.0% in the euro area as a whole.]
Before coming to an end, let me touch on my final question on the future outlook of the
overall economy and consumption and retail in particular.
[Slide 7] Recent statistical releases and survey evidence continue to be consistent with the
picture of a positive underlying momentum of the recovery in the euro area. The global
recovery is expected to continue. At the same time, private sector domestic demand should
gradually strengthen further, supported by the accommodative monetary policy stance and
the measures adopted to restore the functioning of the financial system. However, the
recovery in activity is expected to be dampened by the process of balance sheet adjustment
in various sectors.
We expect private consumption to grow at relatively moderate rates in the coming quarters
before starting to gradually strengthen again. This can be explained by:
First, still weak labour markets and moderate growth in compensation per employee are
likely to continue to prevent any significant rebound of disposable income. Nevertheless, real
incomes are expected to benefit somewhat from improved corporate profitability.
Second, even though the saving ratio may decline slightly more, it wouldn't surprise me if it
remained above its pre-crisis level over the coming years as a result of heightened economic
uncertainty.
And third, a further strengthening in the growth rate of loans to households may still be
contained by continued high debt levels and subdued developments in euro area house
prices. At the same time, the results of the latest bank lending survey indicate that banks
expect a lower degree of net tightening of credit standards for loans to households for house
purchase in the third quarter of 2010. The same holds regarding credit standards for loans to
households for consumer credit and other lending, where banks still expect a net tightening
but somewhat less so in the third quarter of 2010.
In conclusion, let me summarise my main points:

The development in retail sales and hence also total demand in the economy were
affected negatively the recent financial crisis.

EU governments and the ECB have reacted to the crisis in a swift and effective
manner, avoiding worse outcomes and bringing the economy back on track.

With regard to the future, I am confident that the economy is on a good recovery
track. Now is the time to ensure that recovery and to make the growth prospect
sustainable for the future. For this I see three major policy challenges ahead:
First, it is important to engage in sound fiscal policies. Indeed, a number of countries have to
meet major challenges, and immediate, ambitious and convincing corrective actions are
required. It is crucial to strengthen public confidence in the capacity of governments to return
to sustainable public finances. If such a consolidation process is pursued in a credible way,
short-term effects on economic growth could be followed by the positive effect of
consolidation on confidence and the expectations for future growth.
Second, the urgent implementation of far-reaching structural reforms is essential to enhance
the prospects for higher sustainable growth. Major reforms are particularly needed in those
countries that have experienced a loss of competitiveness in the past or that are suffering
from high fiscal and external deficits. Reforms are needed in the area of labour markets in
order to strengthen productivity growth. We also need increased product market competition
and greater investments in education to facilitate restructuring and to foster innovation and
the adoption of new technologies.
And third, we at the ECB have the responsibility to continuously ensure low and stable
inflation. This will support the purchasing power of euro area households, facilitate price
comparisons and lower the real cost of credits. As we have delivered on this in the past
11 years, I am confident that we will continue to do this in the future.
Thank you very much for your attention.
BIS Review 140/2010
BIS Review 140/2010
BIS Review 140/2010
BIS Review 140/2010