Yesterday brought us an example of tempting fate as we were told this by the Governor of the Bank of France.
ECB’S VILLEROY: IT IS UNLIKELY THERE WILL BE A RECESSION NEXT YEAR. ( @financialjuice)
That struck a chord after the news from France on Friday. The statistics office told us this.
In October 2022, production fell again over one month in manufacturing industry (-2.0% after -0.5%) as in industry as a whole (-2.6% after -0.9 %).
So we have a picture of a decline at the end of the third quarter which accelerated in October and as economic growth back then was only 0.2% there is an increasing possibility that the economy is declining. Also the falls were widespread.
In October 2022, production fell again in the extractive industries, energy, water (-5.6% after -2.8%) and “other industrial products” (-1.6% after -0.2%) . It fell back into capital goods (-3.5%, after +0.7%). It fell sharply in coking-refining (-46.3% after -6.5%) due to the strike movement which affected the refineries. Production fell again in transport equipment (-1.9% after -3.2%): it fell in automobiles (-5.8%, as in September) but rebounded in other transport equipment ( +1.3% after -1.0%).
We can reduce the decline a bit to allow for the strike in the coking industry. However the fall in the energy category reminds us of the struggles that Edf has had this year with France’s nuclear output. That looks to be in play this morning with the UK exporting some 2.5 GW of electricity to help out. The decline in this area looks to havebeen added to by the services sector last month.
The seasonally adjusted S&P Global France Services PMI®
Business Activity Index fell beneath the vital 50.0 threshold
in November for the first time since March 2021, indicating
a decrease in activity levels across the French service
sector. At 49.3, this was down from 51.7 in October, ending a 19-month sequence of continued expansion. ( S&P PMI)
The services fall is marginal but we now that production is struggling so we are now looking like the decline is on. That is also the impression given by S&P Ratings on Friday night.
We reduced our 2023 GDP growth forecast for France to 0.2% from 1.7% in our July 2022 review and increased our budget deficit forecast to 5.4% of GDP from 4.0%, with the latter averaging 4.9% over 2023-2025 versus 3.6%, and general government debt rising to 112% of GDP by 2025.
I will return to the public finances issue but if we stick to the growth point the significant factor here is the 1.5% fall in the GDP forecast in a mere 5 months or so. As their forecasts are not accurate to 0.2% they are saying there will be no growth in 2023. That is significant because they were very unlikely to switch to predicting a recession as that would embarrass their previous forecast too much. Plus I note that they think there will be the wrong sort of Euro area solidarity.
The economic slowdown in Europe will constrain French growth.
This morning the wider PMI survey gave us an update on that.
Output levels across the euro area shrank once again in
November, extending the downturn into a fifth month.
Although the rate of contraction eased for the first time over
this sequence due to a slower fall in manufacturing
production, this masked an accelerated decline in the
eurozone’s dominant services sector. Excluding months hit
by COVID-19 restrictions, November’s contraction was the
second-sharpest since May 2013.
According to it France at 48.7 is doing relatively well compared to the Euro area 47.8 although another way of putting it is that it is in the group of countries doing better than Germany which is particularly weak.
Energy
This is a developing issue as I looked at last Wednesday. Today has its issues for France because someone at Edf got their calculations wrong.
On a highly observed day EDF Trading accidentally sold 1500MW too much on EpexSpot day-ahead auction ==> price is artificially too low. Let’s see what happens on intraday market ( @Emericdevigan )
That is why France is taking 2.5 GW from us. The issue is added to by it getting colder and also that systems are more stressed with less margin. The impact so far is this according to Emeric.
Intraday markets up around 50€/MWh this morning vs day-ahead clearing price. Day is not over, and for once real-time demand is above forecasts…
On a broader scope I see him noting some research pointing out the issue with French nuclear in that a capacity of 61 GW has faded into an expected 40 GW. This led on Thursday to plans reported by RFL.
The French government is putting a plan in place to deal with the looming energy crisis as fears rise of electricity power cuts. A directive will be sent to regional police chiefs to anticipate scheduled power cuts, which could affect 60 percent of the population in the worst-case scenario.
In terms of the nuclear fleet the use of the word temporary already has echoes of what happened with inflation.
“Historically, France is an exporter because of its very large nuclear fleet, however, now it turns out that it has temporary difficulties … (which) will be resolved but it will take a few years,” he told France Info on Thursday.
The issue with the import numbers below is that France will be hoping for power from the UK via the interconnectors whilst the UK is hoping for power from France.
He said France would turn to European neighbours to import up to 15 GW, which represents “a useful amount” to cope with a peak in electricity consumption of around 90 GW, and “contributes to being able to avoid cuts”
She will also have to look elsewhere as due to the fire at one the present capacity is 3.5 GW. It will require some luck for cold days in France to be windy ones in the UK so we can help out.
Switching back to the impact on industry I note this in the article.
Electricity consumption in France fell by 6.7 percent last week compared to the average for previous years (2014-2019), a drop “largely concentrated in the industrial sector”, according to RTE’s latest report on Tuesday.
A clear hint of output and it also raises a wry smile as we used to look at electricity production in China as a guide to the economy and it seems the worm has turned.
I am not sure this about gas is the triumph the Financial Times is trying to present it as either.
“Industry is proportionally driving the biggest reductions in gas consumption, and this is entirely the result of clear market pricing,” said Tom Marzec-Manser, lead European gas analyst at ICIS. The high gas price has “disincentivised” use, he added.
Interest-Rates
To the slowing situation we can return to the the Governor of the Bank of France.
The ECB should raise interest rates by 50 basis points this month to tame surging consumer prices, said Governing Council member Francois Villeroy de Galhau. ( Bloomberg)
So they interest-rates will be 2% assuming he gets his way making them 2.5% higher this year. Plus he wants more.
expects rate hikes will continue after that meeting, and says he is unable to forecast when they would stop ( Forexlive)
Comment
Everything seems to be heading south at once with the economy struggling. I have made the point many times that central banks are now increasing interest-rates out of phase and the ECB has been one of the worst. The delaying means that the impact of the rises is arriving as the economy was weak anyway in the exact opposite of what monetary policy is supposed to do.
Looking at France’s situation there is also one with the public finances which is linked to inflation. She chose to switch some of her inflation to the public finances ( and some of it to Edf that has also hit the public finances). If we return to the S&P negative outlook it is here.
France’s headline inflation remains the lowest in the euro area, partly thanks to government support measures. These include caps on gas and electricity price increases and fuel rebates, which should help reduce headline inflation more than 2 percentage points (pp) on average in 2022, according to the government. The government expects an extension to caps on gas and electricity prices will reduce headline inflation more than 3 pp in 2023.
That is how France has an inflation rate of 7.1% which is relatively low. But it impacts here.
We now expect the budget deficit to average 4.9% over 2023-2025, versus 3.6% previously, with general government debt to GDP rising over our forecast horizon.
That will impact on real wages which on pre tax terms will look relatively good until taxes rise to pay for this.
As to the debt situation there are risks as the numbers rise but it looks contained for now.
Nevertheless, because the average maturity of French government debt is long dated (above 8.5 years) and the average interest rate on outstanding debt is low (above 1.5%), a pass through of market rates into the cost of total debt would likely be very gradual. ( S&P)
A possible X-Factor is this.
*VILLEROY CALLS FOR MEASURES TO REDUCE BALANCE SHEET IN 1H ’23 ( @C_Barraud)
The ECB selling French government bonds will add more to the mix, if it happens/