New Figures Hint that Worst May Be Over for French Economy

"Flash" PMI Shows Moderating Contractions in Manufacturing and Service Sectors

The "flash" composite purchasing managers' index (PMI) published by Markit/CDAF has revealed that activity in the manufacturing and service sectors continued to contract in April, although at a more modest pace than in March. Specifically, the composite index, which combines both sectors, stood at 43.5 in April, up from 41.4 in March. The index thus rose for the second successive month, albeit from very low levels (the February reading had been the lowest since the data were first collected in 1998). Indeed, despite its recovery, the index still sits well below the critical value of 50.0, which indicates unchanged activity. The "flash" estimate for the manufacturing sector stood at 40.0, its highest level since October 2008. Output levels and new orders in the manufacturing sector continued to contract, although at a significantly weaker pace than in recent months, while backlogs of work also fell at their softest rate since September 2008. At the same time, the "flash" estimate for the service sector also rose to 46.2, its highest value since November 2008. The breakdown of this index shows that not only did new business fall at its weakest pace in five months, but the index related to business expectations also rose markedly to its highest value since June 2008 and is now well into positive territory. On a more negative note, despite a modest improvement, the indices related to employment in both sectors continued to be at very low levels.

Business Confidence Improves for First Time in 15 Months

Having failed to increase for more than a year, data released by the National Institute for Statistics and Economic Studies (INSEE) show that confidence in the French industrial sector rose in April. Specifically, the seasonally adjusted industrial economic climate indicator stood at 71 in April, up from 68 in March and February and 73 during December and January. Confidence in the industrial sector has been trending downwards since the start of 2008, and despite its modest improvement in April it remains very low. Indeed, March's reading had been the lowest since the data were first collected in 1998, and the index still sits well below its long-term average of 100. The breakdown shows that, despite the improvement in the synthetic indicator, the index related to recent changes in output actually fell in April. Nevertheless, demand and order levels (total and foreign) appear to have increased slightly, despite still standing well below their normal levels. Moreover, the survey also shows that industrialists were less pessimistic about both their personal outlook and, in particular, the general outlook of the economy.

Outlook and Implications

Following contraction of 1.1% quarter-on-quarter (q/q) during the final quarter of 2008, short-term indicators show that GDP is likely to have declined by an even greater amount during the first three months of 2009. However, the figures released today, combined with better-than-expected data on industrial production, hint that the worst may be over. It is expected that lower inflation, which boosts households' purchasing power, significantly lower interest rates, and the fiscal measures implemented by the government will start to feed through to the real economy, first moderating the falls in activity and then eventually stabilising the economy by the end of the year. Specifically, IHS Global Insight currently estimates that French GDP waned by 1.6% q/q during the first quarter of 2009, and we forecast further falls of 0.8% q/q during the second quarter and 0.3% q/q during the third quarter, before stagnation during the final three months of the year. All in all, we see French GDP contracting by 3.2% in 2009 and then growing modestly by 0.2% in 2010, down from a rise of 0.7% in 2008.