Monday, October 1, 2012

France facing double-dip recession

Bad economic news from France continues to pour in, pointing to weakness in the Eurozone core states. As discussed earlier (see this post), France is facing a second recession in 3 years. This morning's manufacturing PMI numbers confirmed the nation's economic difficulties. The chart below compares Markit Manufacturing PMI with INSEE Production index, which is reported on a lag. The PMI survey has been a good predictor of the country's manufacturing output and is now at levels not seen since 2009.


Markit: - Business conditions in the French manufacturing sector worsened further in September. The headline Purchasing Managers’ Index® – a seasonally adjusted index designed to measure the performance of the manufacturing economy – recorded 42.7, down from 46.0 in August. That was the lowest reading since April 2009 and indicative of a substantial deterioration in operating conditions.

Underlying the latest weak PMI figure was a steep reduction in the volume of new orders received by French manufacturers during September. The rate of contraction in new work accelerated to the sharpest for three-and-a-half years, with panelists commenting on a tough economic climate and clients postponing orders.
As an example of how serious the situation has become, Alen Mattich had a nice write-up this morning looking at France as "Spain in disguise". A comparison such as this would have been inconceivable a few months ago, but that is no longer the case.
WSJ: - France’s difficulties aren't as dramatic as Spain’s. But all the signs are that France will turn in Spain’s direction. And if France’s rather expensive albeit not quite bubbly property prices start to come down, French banks could be in trouble on the domestic front, and not just because of the bad loans they were making to the rest of Europe.
The economic contraction is clearly visible across the board, including consumer spending such as auto sales.
FT: - Registrations of new passenger cars in France fell 18 per cent last month compared with a year ago to just under 137,000 units, the CCFA carmakers’ association reported on Monday. The French market is down 14 per cent for the year to the end of September at 1.43m units, CCFA said.
As France battles budget deficits in the area such as social security (something the US has unfortunately been avoiding), cuts and tax increases will exacerbate this contraction.
NASDAQ: - The French government Monday presented a social security budget with over €5 billion of fresh cuts and tax increases as part of the country's wider effort to bring its deficit down to 3% of gross domestic product in 2013.

France has run large deficits in its social security system for many years, totaling €60 billion between 2002 and 2012.

"Social security spending is a day-to-day expense. It is unjustified to pass the financing of this to future generations," the government said in the presentation of the measures.


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