European retail sales declined at a faster pace in May as rising unemployment prompted consumers to hold back spending, the Bloomberg purchasing managers index showed. The gauge of euro-region sales fell to 47.1 from 48.4 in April when adjusted for seasonal swings. The index has been below the 50 mark, which signals contraction, since June. It is based on a survey of more than 1,000 executives compiled for Bloomberg LP by Markit Economics. The euro area economy may shrink 4 percent this year, according to the European Commission, as exports decline and companies cut output and jobs. While some recent data suggest the economy is stabilizing, the slump is still feeding through to the labor market, pushing up unemployment and countering the impact of cooling inflation on household spending power. “If the economic situation doesn’t improve and demand return soon, there’s a big chance unemployment will continue to rise,” said Elwin de Groot, a market economist at Rabobank Group in Utrecht, the Netherlands. That will “continue to affect consumer spending in the second half.” The gauge of sales in Germany fell to 46.3 this month from 48.9 in April, indicating the pace of decline accelerated in Europe’s largest economy. Sales in Italy and France also fell at a faster pace, Markit said. The index of annual sales growth across the euro area fell to 38.7 from 51.9. “The index lost nearly all the ground it had recovered in April, when annual sales growth was indicated for the first time since last May,” said Markit. Job Cuts Profit margins remained “under pressure” in May and stores continued to fire workers, led by French and Italian retailers, according to today’s report. Europe’s unemployment rate rose to 8.9 percent in March, the highest in more than three years. The rate will increase to 9.9 percent next year and 11.5 percent in 2010, the commission forecasts. Metro AG, Germany’s largest retailer, this month reported that its first-quarter loss widened from a year earlier. Sales at Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, fell 3.3 percent in the quarter. Bulgari SpA, the world’s third-largest jeweler, this month posted its first quarterly loss in a decade on slumping sales of Assioma watches and Allegra jewelry. The European Central Bank this month stepped up its fight against the recession by lowering its benchmark interest rate to 1 percent and pledging to buy 60 billion euros of covered bonds, low-risk securities backed by mortgages and public-sector loans. While the euro-area economy is still shrinking, some data suggest the pace of contraction is easing. German business confidence rose in May for a second month, while French consumer and manufacturer sentiment also increased. Retailers expect sales to pick up in June, Markit said in today’s report, as they hope that “an impending wider economic recovery will support consumer demand.” Praktiker AG, Germany’s second-biggest home-improvement retailer, said yesterday that revenue has rebounded in its domestic market since the end of March. It described May as “friendly,” without providing more details.

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