FRANKFURT (AFP) — German retail sales posted a surprise drop of 1.8 percent in June, but analysts disagreed on Monday 3 August over whether the provisional data was really bad news for Europe's biggest economy.

Shoes and boots are on display in the western German city of Duesseldorf - Photo: AFP

The figure was much worse than a forecast rise of 0.5 percent compiled by Dow Jones Newswires, and came as revised numbers from the national statistics office showed a month-on-month drop of 1.3 percent in May.

The Destatis office's estimate for June was based on seven German states that represent around 76 percent of total retail sales.

"Despite continued stable consumer sentiment, sales are set to fall sharply again in the coming months, the main driving force being the deterioration on the labour market," Commerzbank analyst Simon Junker warned.

The latest measure of consumer sentiment by the GfK institute showed a fourth rise running to the highest level since June 2008, but German unemployment has also risen amid the country's worst recession for 60 years.

Unemployment was expected to climb further as workers on state-backed part-time schemes end up joining jobless queues.

UniCredit economist Alexander Koch said the latest retail sales figures demonstrated that a counter reaction to a government car scrapping bonus had begun and would continue in coming months.

Car sales have been boosted since January by a state subsidy of 2,500 euros (3,560 dollars) for those who turn in an old car and buy a new one, but the surge has come in part at the expense of spending on other items.

Koch said: "All in all, real private spending has held up relatively well so far this year supported by the car scrapping premium and strong disinflation."

He warned however that limited rises in unemployment along with falling inflation had underpinned consumption and noted that "the worst is yet to come on the German labor market.

"Together with the backlash in domestic car sales this should weigh increasingly on private spending in the coming quarters."

Natixis economist Costa Brunner believed private consumption would support economic activity in the second quarter of 2009, but also expected "an air pocket" once the German summer had ended.

Goldman Sachs counterpart Dirk Schumacher advised however that the disappointing sales figures "should not be taken at face value."

He noted that Destatis often revises its initial estimate and pointed to surveys which showed that "sentiment among retailers has been rising for months, suggesting that the situation is better than what these numbers imply."

Finally, Commerzbank's chief economist Joerg Kraemer focused on rising German industrial output, and said: "It now looks as though the German economy could grow by as much as 1.0 percent in the third quarter" from the previous three-month period.

By William Ickes