Retail sales in the Eurozone rose at the fastest rate since May 2008 in the final month of 2010, according to the latest survey data from Markit. Germany and France remained the key growth drivers.

The Eurozone Retail PMI (Purchasing Managers' Index) - -  which tracks monthly changes in the value of sales at retailers – improved to 52.9, from 51.3 in November. The latest figure was also the ninth-highest in seven years of data collection to date. Figures for Q4 as a whole signposted the best overall growth in sales since Q4 2006.

Eurozone retail PMI data are based on responses from the three largest euro economies. December data signalled that France and Germany continued to outperform Italy. German and French retail sales both rose solidly compared to November, while Italian sales declined at a weaker rate.

German retail sales rose for the third month running in December. The rate of growth eased slightly since November, but remained sharp in the context of historic survey data. The respective index was well above its long-run trend in seven years of data collection to date.

French retail sales increased for the second consecutive month in December. Moreover, the rate of expansion accelerated to its fastest since May 2008. Overall sales were partly boosted by strong demand for autos while government incentives remained in place.

Italian sales fell in December, but at a softer pace. The month-on-month rate of contraction was the second-weakest of the current eleven-month sequence, and favourable compared to the long-run series average.

Retail sales in the Eurozone rose on an annual basis for the first time in four months in December. Moreover, the rate of expansion was the fastest since May 2008. Germany and France both posted sharp annual rates of growth in retail sales, which accelerated compared to November, while Italy registered a further steep slide. At the detailed sector level, food & drink posted the steepest year-on-year increase in sales.

On average, retail sales across the Eurozone were only slightly below target in December. The degree to which actual sales were lower than original plans was the weakest in the current sequence, which stretches back to May 2007. German retail sales beat expectations for the first time since July. That said, German retailers were less confident than their French and Italian counterparts regarding the outlook for January sales.

Growth of retail sales in December was supported by higher employment in the sector. Eurozone retail workforces have expanded on average five times in the past six months. Mirroring the trend for sales, German and French retailers took on more staff while falling headcounts were recorded at their Italian counterparts. The overall rate of job creation in the Eurozone retail sector was modest.

Strengthening demand in the Eurozone retail sector led to a second successive monthly increase in the value of purchases by retailers. It was the first back-to-back growth registered since March 2008, and the rate of expansion in December was the strongest since April 2007. Meanwhile, the value of goods held in stock at retailers rose for the eighth time in the past nine months, and at the fastest rate since July 2008.

Downward pressure on retailers’ profitability was maintained in December, despite faster growth of sales during the month. However, the rate of deterioration in gross margins was the weakest since January 2008.

Purchase prices paid by Eurozone retailers for goods for resale rose at the fastest rate since January 2009 in the latest survey period. The acceleration in inflation brought it broadly in line with the long-run trend seen since the survey started in January 2004.

Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit and author of the Eurozone Retail PMI, said:  "The Eurozone Retail PMI built upon November’s upward movement, rounding off the best quarter in terms of monthly sales growth since Q4 2006. The latest data suggest that consumer spending growth will accelerate in the final quarter of 2010, with German consumers leading the way and France appearing to have emerged from protest-related disruption in the autumn.

"December data reinforced the national variations across the currency bloc, with Germany and France continuing to outperform their southern neighbour Italy. That said, the rate of decline retail sales eased sharply in Italy, adding to hopes that the consumer sector will help lift economic growth in the fourth quarter from the meagre 0.3% rise seen in the three months to September."