German retail sales unexpectedly declined in February as the deepening recession squeezed private consumption.

According to provisional data released by the Federal Statistical Office, retail turnover in real terms decreased 0.2% month-on-month in February after falling 0.9% in January. The decline was in contrast to a 0.3% increase forecast by economists.

On an annual basis, retail sales dropped 5.3% after falling 1.4% in January. Economists had expected a 1.2% fall for February. In nominal terms, sales fell 5.3%.

In the first two months of the year, retail sales fell 3.3% year-on-year in both real and nominal terms.

The figures show that retail is also suffering from the poor state of the economy, Commerzbank analyst Simon Junker said in a note.

The largest Eurozone economy experienced its biggest sequential contraction, since the reunification in 1990, on plunging exports in the final quarter of 2008. Gross domestic product fell 2.1% in the fourth quarter, after contracting 0.5% each in the second and third quarters of 2008.

Tuesday, the Organisation for Economic Co-operation and Development said in its interim economic outlook that Germany's real GDP is projected to fall by about 5% in 2009, before embarking on a slow recovery in 2010.

According to Junker, the February retail sales figures indicate that the recession is now spilling over to private consumption. And no improvement is expected for the months ahead, despite the economic stimulus packages. The OECD forecast private consumption to remain stagnated this year and the next year.

Commerzbank analyst said developments in the labor market will impact private consumption. Tuesday, Germany's Federal Labor Agency reported that seasonally adjusted unemployed persons rose 69,000 in March, bigger than 50,000 increase in February. The OECD said German unemployment is projected to rise sharply in 2009 and further in 2010.

However, the situation in the retail sector is not as dramatic as in industry. The retail sector has been spared heavy losses so far. As the deepening economic slowdown reduced demand from across the globe, German industries lowered production, investment and employees.

Results of the latest Purchasing Managers survey released on Wednesday showed that the German manufacturing contracted further in March. Industrial production in January declined the most since the reunification of Germany in 1990, signaling a further contraction in the first quarter GDP. In addition, German business confidence deteriorated to a historical low in March.

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