The VAT increase in January has hit consumers

Sales declined 1.8%, according to figures released by the Federal Statistics Office. Economists had expected a rise of 0.1%.

Observers blamed the weak data on the delayed effect of the government's rise in VAT from 16% to 19% on 1 January.

But, according to other data, consumer spending could be about to pick up.

On Thursday, official figures showed June's jobless numbers fell 37,000, on a seasonally-adjusted basis, to 3.82 million, reducing the unemployment rate from 9.2% to 9.1%.

And in May, research group GfK said that it expected its confidence index to hit 7.3 points in June, up from 5.7 points in May as corporate tax cuts have enabled employers to push up salaries.

Improved employment prospects

The pickup in consumer spending is probably going to take longer than many think Sebastian Wanke, DekaBank

Besides Chancellor Angela Merkel's business-friendly reforms, the improved labour market has also been supported by rising demand for exports and increased domestic spending - part of a wider recovery in the main economies of the eurozone.

This, in turn, should support increased household consumption, which economists hope will form the backbone of German economic growth in 2007.

The Organisation for Economic Cooperation and Development (OECD) recently raised its forecast for German growth to match last year's 2.8%, a six-year high.

But some analysts are cautious about how quickly consumers will return to the High Street.

"The pickup in consumer spending is probably going to take longer than many think," said Sebastian Wanke of DekaBank.