Austerity-hit Italians avoid shops, sales drop

ROME (Reuters) - Italian retail sales fell for the fourth month running in July, data showed on Wednesday, highlighting how austerity measures and unemployment are discouraging shoppers and deepening a year-long recession.

Sales dropped 3.2 percent in July compared to the same month last year, National statistics office ISTAT said, for their steepest fall since a 6.8 percent drop in April, the largest decline since the current data series began in January 2001.

With Italians buckling under the impact of a severe recession, tax hikes, falling disposable incomes and rising unemployment, the prospects for a rebound in consumer spending are looking increasingly bleak.

Retail lobby Confcommercio said this week that consumer spending is set this year for its biggest post-World War Two decline, and data from ISTAT shows consumer morale has only recovered slightly from a historic low hit in June.

"Domestic demand is suffering mainly because of the effects of the government's fiscal measures and the way financial market conditions impact confidence and credit," said Paolo Mameli from Intesa Sanpaolo.

He expected consumer spending would carry on falling until the end of the year, then stagnate at the start of 2013 and only start to recover slightly in the second half of next year.

Last week the government said gross domestic product (GDP) would shrink this year by 2.4 percent, twice as much as its previous projection in April for a 1.2 percent drop.

It also lifted its budget deficit and debt forecasts despite the painful austerity measures rushed through by the government after Prime Minister Mario Monti replaced Silvio Berlusconi as prime minister in November to head off a debt crisis.

Both Intesa's Mameli and Fabio Fois from Barclays Capital expect weak domestic demand to weigh on the economy in 2013 as well, forecasting GDP declines of 0.5 percent and 0.4 percent respectively, lower than the government's projection of a 0.2 percent contraction.

Consumer spending has long been an Achilles heel of the Italian economy, which has been the most sluggish in the euro zone for the last decade.

In July, food sales fell 2 percent on the year and non-food sales dropped 3.8 percent. Sales at big distributors slipped 2.3 percent compared to a 3.8 percent decline at smaller shops.

"The drop is generalized across all sectors," said Mameli. "Before supermarkets and discount shops were holding up, but now they are also registering falls."

The retail data is not adjusted for consumer price inflation, which stood at 3.1 percent year-on-year in July, based on the main domestic NIC index, suggesting a more marked annual contraction of retail sales in inflation adjusted terms.

In the first seven months of the year, unadjusted retail sales were down 1.7 percent compared to the same period last year, mainly due to a decline in non-food items, ISTAT said.

(Editing by Susan Fenton)