France vs Germany

Is the economy doing better in Germany than in France? Or is it the other way around? Third quarter eurozone gross domestic product data indicated it was the former. German GDP rose by 0.7 per cent, compared with a measly 0.3 per cent in France.

But purchasing managers’ indices today still show France doing much better than its larger neighbour. The French composite index – covering manufacturing and services – stood at 59.8 in November. The equivalent reading for Germany was just 53.5. With the exception of a short burst in 2006, French private sector activity is growing at the fastest rate for about nine years, according to Chris Williamson, chief economist at Markit, which produces the survey. The difference, he says, is accounted for by the service sector with French consumers apparently doing more to support their country’s growth prospects.

So take your pick. Either the eurozone story is of a French-led revival in which the country’s well-balanced economy (dependent on neither exports nor an over-inflated housing market) is showing its strengths. Or it is of an export-driven German economic powerhouse benefiting from the pick-up in global trade.

Which is more believable? Of course, it could be a bit of both. The PMIs and GDP figures measure different thing; the PMIs do not cover government spending, for instance. The GDP data could also be revised. Given the volatility of economic statistics and surveys, a fair conclusion would be that the two largest eurozone economies are both doing fine, thank you very much.

But my hunch is that the European Central Bank would lean more towards believing the German rather than the French story. It has become more suspicious recently of the PMI surveys, which prior to the crisis had established a reputation as reliable indicators of future trends in economic activity. The November ECB monthly bulletin noted that “the fairly close historical relationship between high-frequency survey indicators and national accounts data appears to have broken down over the crisis period”. In particular, the PMIs failed to gauge the severity of the downturn at the start of this year. It does not help the PMIs credibility that currently they suggest the eurozone is lagging behind the UK, even though the UK was still in recession in the third quarter.

Moreover, the ECB is wary about French expansionary fiscal policies, which it fears are building up problems for future years - even if France is currently enjoying a gentler ride than other economies.

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