January 2, 2014 2:51 pm

PMI indicators raise worries over French economy

Is France now the ‘sick man’ of the eurozone economy?

The latest manufacturing indicators from the data company Markit released on Thursday showed France, the eurozone’s second-biggest economy, lagging well behind its partners in an otherwise encouraging recovery in the single currency area.

While Germany, Italy and Spain showed marked expansion in factory output in December, the manufacturing purchasing managers' index for France showed a decline to a seven-month low.

It stood at 47, three points below the 50 level that marks expansion and well behind the 52.7 result for the eurozone as a whole. The figures most starkly underlined the divergence in performance between France and Germany, which stood at 53.4.

“France is seeing a steepening downturn, in part the result of widening export losses,” commented Chris Williamson, Markit’s chief economist. “This suggests that competitiveness is a key issue which the French manufacturing sector needs to address to catch up with its peers.”

On the face of it, the Markit figures, which confirmed preliminary readings published in mid-December, backed a brutal verdict from the Lisbon Council think tank last month that “France is the real sick man of Europe”.

Few argue with the notion that France still has a distance to travel in undertaking structural reforms in areas such as public spending and the labour market to reinvigorate a sclerotic economy.

“One major reason why France now sticks out as the real problem of Europe is that most of the usual euro crisis countries have improved so much,” said the Lisbon Council.

But there is some head-scratching over the scale of the gap with peer countries shown by Markit’s readings. These have been out of kilter with other surveys in recent months.

In its December manufacturing indicators, Insee, the French national statistics institute, reported a two point improvement on its scale, with output rising two points to hit the long-term average of 100.

On Thursday, figures for new car sales in France showed a marked uptick in December of 9.4 per cent over the same month a year ago. The two big French carmakers benefited, with Renault sales up 38 per cent and even those for struggling PSA Peugeot Citroën up more than 10 per cent.

“The disconnect between the Markit PMIs and the national surveys is a bit puzzling,” says Tullia Bucco, economist at UniCredit Research.

Both Insee and the Bank of France have reported an accelerating rate of recovery in the wider economy as the year turned – albeit at a modest rate. They forecast fourth-quarter growth of 0.4 to 0.5 per cent, with the recovery continuing this year.

A number of economists have remarked that Markit PMIs have tended to underestimate activity in France recently. “Obviously you cannot ignore them completely, but you need to balance them against other information,” says Ms Bucco. “I expect the French recovery to continue to unfold.”

Part of the puzzle about French performance may be explained by the fact that the economy did not reverse as dramatically during the crisis as some other eurozone countries and so is rebounding less dramatically.

A recent Insee study of corporate investment made this point, saying that although investment declined by 1.8 per cent in 2013, overall it had held up better than in other eurozone economies since 2008 – and was likely to show a modest recovery in 2014 as the overall economy shifted back into growth.

But whatever the divergence may be in the latest indicators, even the rosiest forecasts only see overall growth in France this year of around 1 per cent. Some expect less than half that.

It is this sluggishness in a country that is one of the main engines of the eurozone economy that has prompted the European Commission and other international institutions – not to mention a chorus of private sector economists – to urge bolder reforms on President François Hollande and his socialist government.

“French aversion to reforms and its politics are indeed a serious tail risk for Europe,” warned the Lisbon Council.

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.


Sign up for email briefings to stay up to date on topics you are interested in