Stronger consumer confidence and continued GDP gains will underpin modest European retail sector growth of slightly below 1% in the euro area and around 1.5% in the UK over the next 12-18 months, despite continued uncertainty in Greece and Ukraine, says Moody's Investors Service in a report published today. Moody's outlook for the European retail sector remains stable for the next 12-18 months.

"With consumer confidence at its highest point in many countries since the global recession and economic growth expected to continue across Europe, we expect the extra cash at consumers' disposal to translate into higher sales for retailers," says Sven Reinke, a Moody's Vice President -- Senior Credit Officer and author of the report.

"Even as disposable incomes begin to rise, we see a shift towards value players across Europe, indicating a permanent change in consumer behaviour. We expect that consumers will choose to spend more on luxuries and treats like holidays than revert to their pre-downturn spending habits."

With the exception of Russia, whose macroeconomic outlook remains weak, Moody's forecasts modest sales growth in all major European markets over the next 12-18 months, driven by a return to GDP growth in Spain, Portugal and Italy and continued solid economic growth in the UK and Germany, where there is low unemployment and rising real wages.

While UK retail sales are expected to grow moderately and could still outpace the rest of Europe, a potential interest rate rise in early 2016 could dampen demand for big ticket items such as cars, furniture and home improvements.

However, the European sector remains vulnerable to risks, such as a potential escalation of the Ukraine crisis or the evolving situation in Greece. In addition, the continued weak euro still weighs on most euro area retailers, although low commodity prices have largely offset the negative impact of more expensive imports from countries outside the single currency.

On the back of shifting consumer behaviour, internet retailing will continue to take a higher share of the market, reaching 10% in Western Europe and almost 20% in the UK by 2020. Multi-channel retailers, such as Metro AG's Media-Saturn and NEXT plc, will likely lead this expansion, taking advantage of their mix of online shopping and store networks to ward off competition from pure online retailers.

Moody's would consider changing the sector outlook to positive if annual retail sales increase by at least 2% over the next 12-18 months.