The Eurozone retail sector was subjected to disruption from exceptionally harsh winter weather in January. Sales fell compared to one month previously at the sharpest rate since March 2009 and dipped in Germany and France. The seasonally adjusted Eurozone Retail PMI (Purchasing Managers" Index) slumped to 46.5, having risen above the 50.0 no-change mark in December (50.3) for the first time since May 2008. Any figure greater than 50.0 represents monthly growth of sales.

The Eurozone Retail PMI survey covers retailers in the three largest Eurozone economies. In January, data and anecdotal evidence from the German and French surveys signalled substantial adverse effects on monthly sales values from harsh weather. In the former, sales were down for the twentieth successive month and at the fastest rate since January 2009. In France, sales fell for only the second time in the past five months, which partly reflected the end of car scrappage incentives in December. The rate of decline in French retail sales was the fastest since February 2009.

Italy did not suffer the same weather disruption as Germany and France, and this was borne out by the latest survey data. Sales rose for the third straight month, and at the fastest rate since September 2005. While retailers reported a wider recovery in economic conditions, the conclusion of car scrap incentives provided an overall boost to the retail sector in January.

Markit Economics who produce the data, said Eurozone retail sales were sharply lower on an annual basis in January, also illustrating the severe disruption caused by the weather. French and German retailers posted marked annual falls in sales, while their Italian counterparts posted the steepest growth since August 2006.

The harsh weather also dented firms’ sales versus targets in January. Actual sales missed originally set plans to a greater extent than in December. German and French retailers fared particularly badly, while Italian retailers’ sales were only slightly off target. Overall, Eurozone retailers hold a broadly neutral view regarding the one-month outlook for sales versus targets.

Lower sales impacted on retailers’ profit margins in January. The latest rate of decline was the sharpest in five months and greater than the long-run series average. The steepest fall in margins was posted in Italy, which panellists mainly attributed to a combination of lower selling prices and higher costs.

January data signalled the fastest rise in Eurozone retailers’ average purchasing costs in ten months. German retailers’ costs rose on average for the first time in six months, while inflationary pressures built up in France and Italy. By sector, prices rose fastest in pharmaceuticals and autos & fuel. That said, the rate of wholesale price inflation remained well down on the six-year historic trend for the series.

Retailers continued to cut back on purchases of stock in January, which led to a further overall decline in inventories. Purchases have fallen continuously since August 2008, and the latest fall was the sharpest since last August. Steeper falls in purchasing by German and French retailers were partly offset by a third successive month of growth in the Italian retail sector.

January marked a further month of job shedding by Eurozone retailers, underlining the overall picture of weakness in the sector. The current sequence of workforce contraction now stretches to twenty-two months. That said, the rate of decline has stabilised at a modest pace in recent months, and in January was the slowest since May 2008.

Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit, said: “Retailers in Germany and France suffered from the severe wintry weather in January, which had damaging implications for the Eurozone retail business climate as a whole at the start of 2010. Sales fell month-on-month at the fastest rate since March 2009, and retailers cut back on new purchases. This was despite the Italian retail sector showing further signs of recovery although, even here, temporary factors and aggressive discounting clearly still play major supporting roles. Meanwhile, the end of car scrappage incentives in France in December has had a visible impact.”

For the Retail PMI, Markit Economics 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.