The January Bloomberg Eurozone Retail Purchasing Managers' Index ("PMI(R)"), an indicator based on a mid-month survey of economic conditions in the euro area retail sector and providing data one month ahead of government issued figures, fell sharply from 52.1 in December to 47.9 in January after allowing for seasonal influences. The index fall was the second-largest in the three-year history of the survey and, by slipping below the 50.0 no-change level, indicated the first drop in retail sales for ten months, with sales falling at a rate not seen for 23 months.



The fall in month-on-month sales largely reflected a steep sales drop in Germany, which contrasted with strong growth in previous months and was widely linked to January's increase in sales tax. The drop in German sales was the largest for two-and-a-half years (an index of 43.9, down from 55.2 in December). However, sales growth also deteriorated markedly in France, slowing for the third consecutive month to a ten-month low of near-stagnation (an index of 50.3, down from 52.4). Only very modest growth of sales was also seen in Italy, which represented an improvement on falling sales seen in prior months (the index rose from 46.9 to 50.6), but was at least in part due to improved car sales resulting from recent government incentives.

The like-for-like annual rate of growth slowed sharply to near-stagnation in January, dropping further from November's three-year survey record high of 57.0, and from 53.1 in December, to reach a ten-month low of 50.3. Higher year-on-year sales in France were offset by falling sales in both Germany and Italy, with the latter recording the steeper rate of decline.

Sales by sector

The strongest sales compared with the same period a year ago were seen for food & drink, followed by household goods and then toiletries & cosmetics. Clothing & footwear and autos both saw sales slip on a year ago, with autos seeing the weakest performance. Although car sales in Italy were boosted by the government's financial incentives to upgrade cars to more efficient new models, sales fell sharply in Germany, due to the sales tax increase, and continued to weaken in France.

Sales against targets

Sales fell short of planned targets to a similar extent to that seen in previous months (an index of 45.3 from 45.7 in December). Shortfalls were of similar magnitude in all three countries. The biggest disappointment against targets was seen for autos (notably in Germany). Only food & drink sales beat targets.

Looking ahead, retailers' expectations of beating planned targets in the coming month rose from December's five-month low, suggesting that sales growth may pick up in February, albeit only modestly. The index rose from 52.9 to 54.9. Optimism was by far the most buoyant in Italy and lowest in Germany, with the latter hit by concerns over the recent sales tax increase. Expectations of beating targets were most buoyant for auto sales (especially in Italy), followed by household goods and then toiletries & cosmetics.

Prices and margins

Prices paid for goods by retailers continued to rise at a steep rate in January. The prices index recorded 59.1 against 60.4 in December. Although slipping to an eight-month low, the rate of inflation remained only slightly weaker than November's survey high. Prices again rose most sharply in Germany, driven up by January's tax rise as well as improved supplier pricing power. Purchase price inflation meanwhile picked up to a 33-month high in France but eased to an eight-month low in Italy.

Retailers' gross margins have fallen throughout the three-year survey history to date, although the rate of decline has eased markedly in recent months as stronger consumer demand has allowed greater scope for retailers to pass on input price rises. The margins index registered 45.4, down from 45.9 in December but remaining well above the survey's long-run average. Margins fell in France, Germany and Italy, with the latter again seeing by far the sharpest deterioration.

Employment

Eurozone retail sector employment fell -- albeit only marginally -- for the first time in ten months in January. The index slipped from 51.5 in December to 49.4. A slight rise in staffing levels in Italy was offset by declines in France and Germany, with jobs growth in Germany deteriorating particularly steeply from December's survey record high.

Retailers' buying and stock trends

The amount of goods bought for resale by Eurozone retailers declined for the first time in eleven months, dropping at the fastest rate since June 2005 (an index of 47.0 against 52.0 in December) as firms cited the need to keep stocks low in the face of uncertain future sales. Retailers' purchasing fell in France, Italy and Germany, with Germany seeing the steepest rate of decline. The drop in buying caused euro area retailer stock holdings to fall for the first time in sixteen months, dropping at the fastest rate for three years (the stocks index fell sharply from 54.1 to 48.6), due to the combination of reduced purchasing of stock by retailers and lower than expected sales.