France: the business climate continues to surprise

In November, the business climate in France remained stable and above its long-term average, painting a very different picture from the PMI indicators. We continue to believe that the economic situation will worsen.

The business climate and PMI are moving in opposite directions

Business sentiment in France remained stable in November at 102, which is above the long-term average. The economic situation worsened somewhat in industry, construction and services, but improved in wholesale trade. Industrial order books and expected demand in services are deteriorating, while inflationary pressures appear to be building.

These data are surprising as they stand in stark contrast to the PMI indices for the month of November, published yesterday. The composite PMI index for France fell below the threshold of 50 for the first time since February 2021, synonymous with a decrease in economic activity of 48.8. While the index for the manufacturing sector continued the decline that began in June, reaching 49.1, it is the trend in the services sector that should be highlighted: for the first time in 20 months, the index fell to a decline of 49.4. The PMI thus indicates that high inflation and reduced purchasing power have put an end to the growth in the service sector that had been made possible by the lifting of Covid-19 restrictions. This marks the end of service support for French economic growth, which was expected to lead to a fall in GDP in the fourth quarter.

In terms of inflation, the situation depicted by the PMI indices is also fundamentally different from that shown by the business climate indicator: according to the PMI indices, inflation in purchase prices and prices paid has fallen to its lowest point in nine months, while remaining well above its long-term average. The decline is even more significant in the manufacturing sector. Although inflationary pressures are still very high, they appear to be easing.

Uncertain prospects

With two indicators that are supposed to depict the same situation developing in such different ways, it is difficult to draw clear conclusions regarding forecasts for the French economy. While the most optimistic would probably prefer to believe the business climate, the PMI indices appear to have been better at predicting French economic activity in recent months. We continue to believe that the French economic outlook is characterized by the weakening of domestic and external demand, the decline in business creation and uncertainty. The momentum in activity from the service sector appears to have ended and manufacturing does not appear to be ready to become the new engine of growth. The labor market is beginning to show the first signs of weakness, which should translate into slower job growth. As a result, GDP growth should be weaker in the fourth quarter than in the third. For 2023, we still fear a slight decline in GDP for the year as a whole.

The French economy contracted in November

France’s private sector economy shrank in November for the first time since February 2021, according to a monthly survey, as a drop in new orders weighed on the euro zone’s second-largest economy.

S&P Global’s flash purchasing managers’ index (PMI) for the service sector in France fell to 49.4 points from 51.7 in October. Any reading above 50 points indicates growth, while readings below 50 indicate contraction.

November’s flash PMI figure for the French manufacturing sector rose from 47.2 in October to 49.1 points. It beat a Reuters poll forecast of 47.0 points, but still remained below the 50-point mark and is therefore still bearish.

November’s composite PMI – which includes both the manufacturing and services sectors – fell to 48.8 points from 50.2 in October and was also below a forecast of 49.5 points in a Reuters poll.

“Although the French manufacturing sector has experienced a slowdown since the start of the second half of 2022, the overall level of economic activity has been supported by continued growth in services. This vital support to the economy appears to have ended as service sector output fell for the first time in just over a year and a half in November,” said Joe Hayes, senior economist at S&P Global Market Intelligence.

As a result, PMI “flash” data indicated the first reduction in French economic activity since February 2021,” added Mr. Hayes.

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