Shoppers are reining in spending amid increased economic gloom

Retail sales in Germany fell back sharply in March, below even the most pessimistic forecasts.

In real, or inflation-adjusted terms, sales dropped by 3% in March compared with February, and lost 4% on the year.

Analysts had been forecasting a drop of around 2.7% on an annual basis.

Increasing unemployment and anaemic economic growth conspired to keep Germans away from the shops.

The sales data from the Federal Statistics Office will alarm policymakers as Europe's biggest economy struggles to shrug off the effects of the downturn.

Gloomy outlook

In a sign of the pain that retailers are feeling, the German department store Ludwig Beck described 2002 as "the most crisis-ridden year yet experienced by German's retail sector in the post-war period".

Ludwig Beck was also low-key about any prospects of a recovery this year.

The sales figures are just the latest piece of economic data to highlight the problems facing the economy.

Last Monday, the Ifo index, which measures the business climate in Germany, showed an unexpected fall in April - dashing hopes of a surge after the end of the war.

The GfK market research group also said this week there would be no real improvement in consumer spending as long as companies kept laying off workers.

Consumer confidence has faltered for the first time in two decades, contributing to weak economic growth of 0.2%, the slowest rate in almost nine years.

Reform agenda

Last month German Chancellor Gerhard Schroeder won party backing for key economic reforms, but only after hinting that a rebellion might lead him to resign.

Mr Schroeder, beset by ongoing high unemployment and a stagnant economy, wants to start introducing the reforms next January.

The changes will include cutting benefits for the long-term unemployed and making it easier for employers to make people redundant.

It is hoped that a more flexible labour market will encourage companies to take on more staff.