Costly living could kill Europe's consumer revival

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Disposable incomes will shrink this year for the first time in a decade in the euro zone, economists at UBS bank predict.

Germany, Italy and Spain could be the worst-hit, according to UBS chief European economist Stephane Deo and colleagues.

Indeed, monthly retail sale surveys, although not considered the final word, reveal tentative signs of damage already.

Retail sales dropped for a second month running in March in the euro zone, according to the EU statistics office, Eurostat. They also slumped in Britain in April, according to the Confederation of British Industry.

Marco Annunziata, economist at UniCredit bank, said what is more troubling is the price rises go hand-in-hand with slowdowns in housing markets in some countries and the crisis in financial markets that is making banks idreluctant to extend credit.

"In Europe, we had just reached the stage where we expected consumers to take up the baton and replace exports as the engine of growth," he said.

"Instead, consumers have been hit first by a depressing daily flow of news about the (markets) crisis, then by lower equity and house prices, and finally by the incessant rise in food and fuel price."

European economic growth, or gross domestic product, staged a significant acceleration in 2006, when GDP in the euro zone rose 2.8 percent, followed by 2.6 percent in 2007, way more than the average of the preceding five years.

But much of the pickup was driven by company investment and exports, while consumption grew at a softer pace of 1.9 percent in each of the two years.

PASSING THE BUCK

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