Euro retail sales suggest upside risk to our above consensus expectation

Euro area retail sales increased for a fourth month in a row in January, when they were up 1.1% m/m. The figure for December was revised slightly higher to 0.4% m/m from 0.3% m/m in the first release.

The increase in January was mainly driven by strong German retail sales, which showed an increase of 2.9% m/m, and sales in Portugal which were very strong, increasing 6.8% m/m. French retail sales were up 0.1% m/m and the Italian and Spanish figures have not been released yet.

The fourth month in a row of higher retail sales confirms our view that the recovery in the euro area is gaining momentum and that it is driven by higher growth in private consumption. The strong start to private consumption in Q1 even suggests some upside risk to our forecast for private consumption. We expect GDP growth to be 1.5% in 2015, which is above consensus of 1.2%.

The continued increase in retail sales should reflect that consumers' purchasing power has been boosted due to the lower oil price. In light of this, deflation in the euro area has not resulted in postponed consumption in anticipation of declining prices.

The stronger retail sales are also supported by the declining unemployment rate and higher growth in employment. The declining unemployment rate has lifted consumer confidence and supported private consumption, although the rate is still very high in some countries.

Progress is also being seen in car registrations, which increased in December and January. Although registrations have trended higher for almost two years, there is still significant pent-up demand to be unleashed.