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Sunday, October 5, 2008

The French Economy Glides Elegantly Into Recession

France's economy continues to slow by the month. Output is down, domestic demand is delining, exports are struggling, and unemployment is up. The tumultuous events of late August and early September in the global financial markets are now evidently making their presence steadily felt on the real economy. And new factor emerged in recent days, with the global banking and financial crisis arriving right on France's doorstep. With no effective remedy whatsoever being offered from Euope's core leaders, the worst is, most definitely, still to come. The banking problems of recent days now cast a long, dark and awesome shadow over Europe's future, and in particular over the future of the Eurozone, since the absence of the political will and the political institutions to make the management of economic problems which are in effect part and parcel of the decision to have a common currency, leaves all of us vulnerable, and rather perilously exposed.

The French Economy Enters Recession

France's national statistics office INSEE reported last week that the French economy contracted in Q3 2008. If this preliminary estimate is confirmed then I am left asking myself which of the big four eurozone economies could possibly be expected to have expanded in the July to September period. Certainly not the Spanish one, which while not technically in recession yet (you need to consecutive quarters of negative growth to classify as being in recession) can hardly have expanded. The German economy almost certainly contracted, and while the Italian one could sneak a surprise "horses-nose" expansion (given the low level it had reached in the 2nd quarter) I think it is unlikely. So here we go - recession in the eurozone.

France's gross domestic product probably shrank by 0.1 percent in the third quarter after a contraction of 0.3 percent in the three months through June, according to the latest Insee estimate. The economy is also likely to shrink 0.1 percent in the final three months to cut growth to 0.9 percent for the full year, the slowest pace since 1993, Insee added.

September Global Manufacturing PMI Shows Sharp Contraction

France's manufacturing sector shrank at its fastest pace in at least 7 years in September as output, new orders and employment all fell at a record rate, according to the Markit Economics Purchasing Managers Index out last Wednesday. This result is hardly surprising, since September seems to have been the ultimate "mensis horribilis" for industrial output internationally, with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).

According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.

French Manufacturing Contracts Rapidly in September

France's manufacturing PMI dropped to 43.0 in September, its lowest level since December 2001. A steep decline in new orders led to substantially lower production, while employment levels contracted at fastest pace for over five years

According to the September Markit/CDAF PMI survey the performance of France's manufacturing sector worsened further in September, precipitated by a heavy drop in incoming new orders following a drop in domestic demand. The headline Purchasing Managers' Index fell from 45.8 in August to 43.0, its lowest level since December 2001.

In a continuation of the trend seen throughout Q3, weakness was primarily the result of depressed demand conditions with new orders declining at a series-record pace in September. Panellists attributed the lack of incoming new work to the current difficult economic climate and an associated lack of confidence amongst consumers and businesses. Faltering demand was again particularly pronounced in the domestic market; although export orders fell at the sharpest rate in over five years, the decline was far less marked than that recorded for total new orders.

According to the Markit report French manufacturers lowered their production levels during September as a response to the latest contraction in new work. Output fell for the fourth consecutive month, and at the fastest rate since the start of the survey in April 1998. Firms were able to make further significant inroads into their outstanding business, with backlogs depleted at a series-record pace. The weak sales trend was also reflected in stocks of finished goods, which expanded at the strongest rate registered by the survey to date.

Most significantly there was survey-record drop in new orders. The seasonally adjusted New Orders Index posted 37.5, down from 41.3 in August and indicative of a marked rate of decline. Anecdotal evidence linked the weakness of new orders to low consumer and business confidence, depressed conditions in the construction sector and global economic uncertainty. New export orders fell for a seventh month in succession during September. At 45.0, down from 49.6 in August, the seasonally adjusted New Export

Orders Index signalled that the latest drop was the sharpest since June 2003. Around 31% of panellists reported lower new foreign orders during the latest month, which they attributed to weak demand in key export markets such as North America, Europe and Asia.

There was evidence of easing inflationary pressures from both the input and output price measures in September. Average costs increased at the slowest rate for ten months, allowing firms to raise their own charges at the weakest pace since last October in an attempt to mitigate softer demand.

In a sign of pessimism over the prospects of a revival in demand during the near future, manufacturers made further cutbacks to staffing levels in September. Furthermore, the latest drop in employment in the sector was the sharpest since July 2003. In line with lower production requirements, French manufacturers made further cutbacks to staffing levels during September. The seasonally adjusted Employment Index remained below the 50.0 no-change threshold for a fifth straight month and fell from 46.7 to 44.6, its lowest level since July 2003 and indicative of a sharp rate of hiring.

cost inflation moderated to a ten-month low, as indicated by the seasonally adjusted Input Prices Index falling sharply from 74.5 to 63.7. Producers of consumer goods signalled the steepest rise in costs.


Sharply reduced demand for inputs alleviated pressure on suppliers during

September and, consequently, average lead-times shortened for the first time in five years (albeit only marginally). This was signalled by the seasonally adjusted Suppliers' Delivery Times Index recording 50.2, up from 47.3 in the previous month.

France's Services Setor Rebounds Slightly In September

French services sector activity remained broadly unchanged in September following falls in the previous two months, that is we are still below the June 2008 level of services output. New business expanded slightly for the first time in four months, albeit the change was only fractional

After two months of contraction, activity in the French service sector moved broadly sideways in September. Output was supported by a very slight rise in incoming new work, in part reflecting discounting strategies as firms competed to win business amid a muted demand environment. Meanwhile, cost inflation continued to moderate from recent highs.

The seasonally adjusted Markit/CDAF Business Activity Index stood at 50.1 in September, up from 48.0 in the previous month, a level indicative of almost unmeasurable growth in the sector.

The volume of incoming new business received by French service providers was broadly unchanged in September, arresting a three-month period of decline. However, anecdotal evidence suggested that trading conditions remained difficult in light of current economic difficulties and subdued consumer and business confidence.

In a number of cases, new order gains were attributed by panellists to discounting strategies. Average charges in the French service sector fell marginally for the first time since April 2004, as companies attempted to stimulate demand through promotions and price cuts.

Lower output prices were in part facilitated by a further easing of input price inflation in September. Costs rose at the slowest rate in twelve months, and at a pace broadly in line with the long-run average for the series. Panel members mainly attributed the weaker increase in costs to the recent fall in global oil prices.

Outstanding business in the French service sector increased for the first time in four months during September. However, growth of backlogs was only marginal and did not prevent companies from making further cutbacks to staffing levels. Employment declined for a fourth successive month, although the latest reduction in workforce numbers was only slight.

Optimism in the French service sector edged up to its highest for three months in September. Panellists anticipated that business expansion programmes and the development of new services would support higher activity over the coming year. However, firms expected that growth would likely be constrained by ongoing weak economic conditions, and the overall degree of confidence was the third-lowest in the survey history.

JP Morgan Global Manufacturing PMI Methodology

The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).

United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.

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