Today has opened with some troubling news for the economy of France and the area driving this will not be a surprise. The official confidence survey series has produced this headline.
In October 2019, the business climate has deteriorated in the manufacturing industry
This is a sign that the problems we see in so much of the world have been hitting France and there has been a particularly rapid deterioration this month.
According to the business managers surveyed in October 2019, the business climate in industry has deteriorated compared to September. The composite indicator has lost three points to 99, moving just below its long term average (100).
If we look back at this series we see that it peaked at 113,5 back in February 2018 and is now at 99.4 so quite a decline which has now moved it below its long-term average, This matters as it is a long-running series and of course 100 for manufacturing means relative decline.
If we look for specific areas of weakness we find these.
In the manufacture of equipment goods, the business climate has lost three points and moved below its long-term average (97). In the in the electrical equipment and in the machinery and equipment branches, the balances of opinion have get worse, more sharply than in September, to stand significantly below their average.
And also these.
The business climate has deteriorated in almost all subsectors, particularly in chemicals where the deterioration is the most significant. In this subsector, as in basic metals, the business climate indicator stands largely below its long-term average.
Maybe a little surprisingly this area seems to be hanging in there.
In the manufacture of transport equipment, the business climate indicator has lost two points in October, after a stability in the previous month, and stands slightly below its long-term average.
That is in spite of this.
The climate indicator has decreased again in the automotive industry and has practically returned to the low point of July. The balance of opinion on general production prospects contributes the most sharply to this deterioration.
They do not say it but the motor industry has fallen to 91.
On the other side of the coin the computing and optical sector seems to be improving.
If we bring it all together then there are concerns for other economic measures from this.
Considering employment, the balances opinion on their past variation and perspectives have declined slightly. Both indicators stand however largely above their long-term average.
That does not seem set to last and for what it is worth ( it is volatile) there is also this.
The turning-point indicator has moved down into the area indicating an uncertain economic outlook.
For context the official output series has been telling us this.
In August 2019, output diminished in the manufacturing industry (−0.8%, after +0.4%)……..Over the last three months, output declined in manufacturing industry (−1.2%)……Manufacturing output of the last three months got worse compared to the same three months of 2018 (−0.8%),
That was something of a troika as all three ways of measuring the situation showed falls.
Is it spreading to other sectors?
So far the services sector is not only ignoring this it is doing rather well.
According to business managers surveyed in October 2019, the business climate in services is stable. At 106, it stands well above its long-term average (100).
The only real flicker is here.
More business managers than in July have reported demand difficulties only.
Construction is apparently continuing the boom which began in 2015.
According to the business managers in the building construction industry surveyed in October 2019, the business climate is stable. The composite indicator stands at 112, its highest level since May 2008, largely above its long-term average (100).
This brings me to the official forecast for economic growth from the beginning of the month.
However, the macroeconomic scenario for France remains virtually unchanged since the June 2019 Conjoncture in France report (with projected growth of +0.3% each quarter through to the end of the year, and +1.3% as an annual average in 2019.
The problems you see are all the fault of whatever is French for Johnny Foreigner.
The international economic environment is deteriorating, due to a combination of several factors: protectionist pressures, uncertainties surrounding Brexit, doubts about the orientation of economic policies in certain countries, etc. Growth forecasts for most of France’s economic partners are therefore revised downwards.
Indeed their statisticians seem to abandon European unity and indulge in some trolling.
These international shocks have had a more negative impact on economic activity in Germany than in France. Indeed, growth in Germany stagnated in the spring (–0.1% after +0.4%), with the weakening of international trade and the slowdown in corporate investment hitting industry much harder than services.
If only German had a word for that. Meanwhile this bit just seems cruel.
Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).
Monetary Policy
Here we go.
the European Central Bank (ECB) extended its highly accommodating monetary policy in September, among other things by lowering the deposit rate and resuming its bond purchases as of November 2019 for a total of €20 billion per month.
I like the way they have cottoned onto my idea that markets mostly respond to QE before it happens and sometimes quite a bit before.
As a result, Eurozone sovereign yields entered negative territory (in the spring for the German ten-year yield and in the summer for the French yield).
Fiscal Policy
There is a clue above that there have been ch-ch-changes. That is represented by the ten-year yield in France being -0.1% as I type this. Borrowing is not a complete freebie as the thirty-year yield is 0.7% but ECB policy ( 420 billion Euros of French government bonds and about to rise) means France can borrow very cheaply.
France is taking more of an advantage of this than my country the UK because it borrowed at an annual rate of 3,5% of GDP in the first quarter of the year and 3.4% in the second. Contrary to much of the official rhetoric we see rises of the order of 1% of GDP here so we can see how domestic demand in the economy has been “resilient”. It is also presumably a response to the Gilet Jaunes issue.
France in debt terns is quite tight on a big figure change and Japan excepted the big figure change as the debt to GDP ratio was 99.6% at the end of June. It will be under pressure from the extra borrowing and thus very dependent on economic growth remaining to stay under 100%.
The number being like that explains why the Governor of the Bank of France diverted us somewhat when he was in New York a week ago.
The euro area has a lower level of public debt (85%) than in the United-States (104 %) or the UK (87%),
Actually the UK is in fact below 85% so it was not his finest hour.
Comment
Today’s journey brings us two main themes. The first is that the French economy has been boosted by some extra government spending. This is in stark contrast to Germany which is running a fiscal surplus. But the ~1% of GDP increase seems to have got a little lost in translation as economic growth has only been ~0.6% so far. However it is a case for counter cyclical fiscal policy as otherwise the French economy may have contracted.
Now we see signs of a downwards turn in the already weakened manufacturing sector which poses a problem with fiscal policy already pushing the boundaries of the Maastricht rules. Also if we look deeper I find this deeply troubling from the Governor of the Bank of France.
Despite this gloomy context, the French economy is resilient, with growth at 1.3% close to its potential.
This is a reference to what is the new central banking standard of annual GDP growth having something of a speed limiter at 1.5%. Let me give you two problems with it. Firstly they seem to get a free pass as to their role in this as one of the biggest changes has been their own actions. Secondly it ignores countries like Spain which may now be slower but have in recent times done much better than this.