German Retail Decline Amid Slowing Import Price Pressures: Navigating the Crosscurrents in Q2 2025

The German economy is caught in a tug-of-war between weakening consumer demand and moderating inflationary pressures, as evidenced by March 2025 data showing a decline in retail sales alongside a slowdown in import price growth. This juxtaposition offers investors a nuanced landscape for strategic decision-making.

Retail Sales: A Fragile Consumption Picture

German real retail sales fell by 0.2% month-on-month (MoM) in March 2025, marking the second consecutive monthly decline. While nominal sales rose 0.3% MoM, the real-term contraction underscores a volume-driven slowdown, with households cutting back on discretionary spending amid lingering inflation. Key sectors such as automobile trade (down 6.8% MoM in February) and miscellaneous goods saw mixed performance, with only the latter posting 2.7% annual growth.

The annual average of retail and automobile trade indices for 2024 showed a 1.8% increase over 2023, but the March 2025 dip suggests a potential reversal of this trend. Weakness in consumer morale—exemplified by a 1.0% drop in household consumption on goods—hints at cautious spending habits, exacerbated by persistent service-sector inflation (+2.3% year-on-year) and stagnant wage growth.

Import Prices: Cooling, but Not Cooling Off

While German import prices fell 1.0% MoM in March, reversing February’s 0.3% rise, they remain elevated year-on-year (YoY) at 2.1%—a slowdown from February’s 3.6% but still above pre-pandemic norms. The decline was driven by plummeting energy costs (e.g., -4.5% MoM for hard coal, -3.6% MoM for crude oil) and agricultural commodities like onions (-39.3% YoY). However, electricity prices remain stubbornly high (+46.5% YoY), reflecting structural supply challenges.

The consumer goods sector, a critical component of retail sales, saw mixed outcomes: cocoa butter prices dropped 7.0% MoM, but confectionery and coffee prices remained elevated. This divergence highlights uneven inflationary pressures, complicating pricing strategies for retailers.

The Interplay: Demand Weakness vs. Cost Dynamics

The simultaneous decline in retail sales and moderating import prices signal a weakening transmission of global cost pressures to domestic demand. While energy and agricultural price declines alleviate input costs for some industries (e.g., food manufacturing), persistent service-sector inflation and weak consumer spending are curtailing sales volumes.

The automotive sector exemplifies this tension: despite falling import costs for components (e.g., non-ferrous metals), new car registrations dropped 6.8% MoM in February, reflecting both consumer reluctance and supply-chain normalization post-pandemic.

Investment Implications

1. Sector Rotations:
2. Avoid: Consumer discretionary stocks (e.g., retailers like Metro AG) exposed to volume declines.

3. Consider: Industrials or exporters benefiting from lower energy and raw material costs (e.g., Siemens Energy, which saw +1.2% stock gains in March amid falling coal prices).

4. Inflation-Proof Sectors:

5. Utilities and energy companies may face headwinds from falling import prices but could capitalize on long-term decarbonization trends.

6. Bond Market Opportunities:

7. A flattening yield curve (as seen in the German 2-year/10-year spread narrowing to 1.3% in Q1) suggests caution about growth, favoring short-term bonds.

Conclusion: Navigating the Crosscurrents

The March 2025 data paints a bifurcated picture: while consumers are pulling back, import price pressures are easing, offering a glimmer of relief for businesses. Investors should prioritize sectors insulated from demand volatility, such as industrials and utilities, while remaining vigilant about sector-specific risks like auto manufacturing.

Crucially, the 2.2% annual inflation rate—still above the ECB’s 2% target—leaves room for further policy tightening, which could amplify retail sector headwinds. For now, the path forward hinges on whether falling import costs can reignite consumer confidence or if persistent service-sector inflation will prolong the slowdown.

In this environment, diversification and short-term tactical plays—such as hedging against energy price volatility or capitalizing on sector-specific rebounds—will be key to navigating Germany’s economic crosscurrents.