An image of the planned new headquarters of the European Central Bank in Frankfurt. The construction is expected to be completed by 2011.

The Markit Eurozone Retail PMI (Purchasing Managers’ Index), based on a mid-month survey of more than 1,000 executives in the retail sector, indicated a sixteenth consecutive monthly fall in same-store retail sales in September. However, after accounting for seasonal influences, the PMI rose from 47.1 in August to 48.6, signalling the smallest monthly decline seen since sales began falling in June 2008.

Of the big-three Eurozone economies monitored  - - which together account for 62% of Eurozone retail turnover - - France recorded the best performance, being the only country to show an increase in sales compared with August. Although only marginal, the monthly rise was the first since January. Italy and Germany saw similar rates of contraction. However, whereas the rate of decline eased to the weakest for almost two years in Italy, it picked up in Germany to the greatest in three months.

Compared to September 2008, like-for-like sales were down in all three countries. However, slower falls in both France and Italy meant that the overall annual rate of contraction for the Eurozone eased to the weakest in five months.

Since the survey started in January 2004, the Retail PMI has been an accurate indicator of year-on-year changes in Eurozone retail sales as measured by Eurostat (at constant prices). As the chart (left) shows, the moderation in the rate of decline in sales indicated by the PMI in recent months has yet to be tracked by the official series.

By sector, only retailers of pharmaceuticals, toiletries and cosmetics reported an improvement in year-on-year sales in September. Even here, the rate of growth was only marginal. Clothing and footwear again posted the sharpest decline, followed by household goods and autos respectively. The latter, having seen a marked easing in the rate of contraction in recent months  -- attributed to the car scrappage incentives - - saw sales fall at a faster rate than in August as these schemes have started to unwind.

Retailers expect improved sales in October. Expectations of retail trade next month compared to planned targets rose sharply and were at their highest in 17 months. The one-month outlook surged in both France and Italy, hitting 19- and 32-month peaks respectively, but remained flat in Germany.

An additional sign of a brighter outlook for Eurozone retailers was provided by the latest employment data. The overall rate of job shedding in the sector eased to the slowest since August 2008, primarily reflecting weaker declines in Italy and France. The latter was notable in seeing the smallest drop in employment since headcounts began falling in June 2008. Retail employment fell at a slightly increased rate in Germany, though it still showed the smallest overall decline of the three countries.

The more positive outlook prompted retailers to reduce the rate at which they cut back on purchases of stock in September. Correspondingly, buying activity fell at the slowest rate for a year in September, and inventories of stock for resale showed the smallest fall for five months.

Prices paid by Eurozone retailers for their stock rose only modestly in September. The rate of purchase price inflation strengthened very slightly for the third month running, having been flat back in June, but remained weak when compared to the survey’s historic trend.

However, divergent patterns were evident across the three monitored countries. Prices fell at a survey-record rate in Germany, contrasting with accelerating inflation in both France and Italy.

Markit says the prices index from the retail PMI survey acts as a reliable leading indicator of consumer price inflation. The latest data signalled that the trend in Eurozone consumer prices has remained broadly flat in September.

Despite a lack of cost pressures, margins at retailers continued to deteriorate at a marked rate across the Eurozone in September. The rate of decline was above the average seen over the survey’s near-six year history, as weak demand limited pricing power. All three countries saw margins fall at faster rates than their long-run averages, with the greatest squeeze posted in Italy.

“PMI” is an acronym for Purchasing Managers’ Index, a type of survey developed originally for tracking business conditions in the manufacturing sector. With such surveys now undertaken in service sectors, construction industry and retail, the acronym has become a generic term to describe the methodology used by Markit Economics for these surveys.

Markit Economics says it currently conducts PMI surveys for 26 countries and key regions including the Eurozone and BRIC. The PMIs have become the most closely watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends. The success of the PMI surveys lies in their ability to provide a rapid and reliable guide to what is really happening in the economy from month-to-month.

For the Retail PMI, Markit Economics says it has recruited a representative panel of retail companies in France, Germany and Italy. Together, these three countries account for approximately 62% of total Eurozone retail sales by value. The panel includes large chain retailers as well as smaller retailers to ensure balanced representation of the true structure of the Eurozone retail sector. Similarly, the composition of the panel by classification of retailer (i.e. type of good sold) is monitored to ensure accurate representation. Markit Economics ensures the correct structure remains in place over time and that response rates remain sufficiently high to generate reliable economic data.