German retail sales surprise to upside in January

German retailers reported a surprisingly strong increase in business at the start of the year, official data showed on Friday. Retail sales, a closely watched measure of household confidence, increased by 2.5 percent in January compared with December, the federal statistics office Destatis said in a statement. That was the strongest increase since February 2007, the statisticians said. Retail sales had dropped by 2.0 percent in December and analysts had been forecasting a much more modest increase for January. On a 12-month basis, business increased by 0.9 percent in January compared with the same month last year, the statisticians calculated. Retail sales data are subsequent to frequent revision, but following a rise in a key consumer confidence index earlier this week, analysts said the outlook for household spending in Germany looks positive. "German households began the new year 2014 on an optimistic note according to confidence surveys and the hard data reflect that," said Berenberg Bank economist Christian Schulz. The GfK consumer confidence barometer rose in February and is projected to rise again in March. "The outlook for consumption in Germany is bright and the January data hint at the potential. A strong labour market, low inflation and an improving economic outlook give households the confidence and means to spend more," Schulz said. "We expect private consumption to be a robust driver of economic growth this year, which could make a strong start into 2014 according to the data received so far," the expert said. Natixis economist Johannes Gareis agreed. The data "underline our scenario that private consumption continues to play a prominent role in Germany's economy this year, after it lost steam in the fourth quarter," he said. "All in all, upbeat consumer confidence, lower unemployment, lower price inflation, and record-low interest rates should clearly translate into more consumer spending in Germany this year," Gareis said. Annalisa Piazza at Newedge Strategy said that households were seeing the benefit of a resilient labour market and some improvement in their disposable income. "Lower inflation, coupled with rising eployment and rising income growth, represent solid pre-conditions for a rebound in consumer spending in the first quarter," she said. "That said, we rule out that German retail sales will continue to rise at the same pace in the remainder of the quarter. Indeed, the series remains very volatile and the January increase might be seen also as a technical correction after the dismal pre-Christmas retail activity," Piazza said.