German retail sales unexpectedly dropped in March as fears of rising unemployment weighed on households' spending intentions.

Monday, data released by the Federal Statistical Office showed that calendar and seasonally adjusted retail sales in real terms fell 1% month-on-month in March after stagnation in February. Meanwhile, economists had forecast a 0.2% increase. In nominal terms, turnover dropped 1.4% following 0.3% increase in the previous month.

Retail sales in real terms dropped at a slower annual pace of 1.5% in March compared with a revised 6.2% decline in February. That was the third consecutive month of decline, while economists had forecast a fall of just 0.3% for March. In nominal terms, turnover fell 1.8%. In the first three months of 2009, retail turnover was down 3.1% in nominal terms and 3.2% in real terms over the previous year.

Recession now finally appears to have reached the retail sector, with further declines to be expected in the months to come given rising unemployment, Commerzbank analyst Simon Junker said.

The analyst added that in view of the gloomy labor market outlook, consumers are now more reluctant to spend, although current low prices are supporting purchasing power.

The number of unemployed in Germany rose for the sixth straight month in April as recession prompted firms to slash more and more jobs. According to data released by the Federal Labor Agency, the number of unemployed rose a seasonally adjusted 58,000 in April, taking the total to 3.46 million.

The German government expects the number to increase to 3.7 million this year and to 4.6 million in 2010. The government expects the economy to contract the most since the World War II in 2009 and to record a small growth in 2010.

The International Monetary Fund expects a 5.6% contraction in 2009 and a further 1% decline in 2010 for the largest Eurozone economy. The lender also expects the German jobless rate to rise to 9% this year from 7.3% recorded in 2008. The rate will increase to 10.8% in 2010, the IMF forecast.

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