Energy shock suppresses consumption, eurozone retail sales weaken sharply in September

(1) In September, eurozone retail sales fell sharply by 0.7% month-on-month, marking the largest drop since June 2024 and falling far short of market expectations for flat growth. In August, retail sales had previously increased by 0.4% month-on-month. (2) The decline was triggered by oil prices rising back above $100 per barrel in September, with heightened Middle East geopolitical tensions fuelling supply concerns. Soaring energy costs dealt a heavy blow to consumer confidence; retail sales in both Germany and France fell, dragging down internal demand across the bloc. France faced additional fiscal concerns and protest activities, sending October consumer confidence to its lowest level in 13 years. (3) Inflation and monetary policy: In September, eurozone inflation rose to 4%, double the European Central Bank’s 2% target. The ECB kept interest rates unchanged, but markets widely expect a third rate hike of the year to arrive in December. Tighter financing conditions have already taken effect: demand for mortgages contracted markedly in the third quarter, putting further pressure on household spending. (4) Dual-sided economy: The unemployment rate remains at a historic low of 6.5%, and wage growth is expected to climb during the first nine months of 2027, which could support discretionary spending and help offset the downward pressures brought by high prices and interest rates.