French Economy Watch

All For One And One For All - "We AreThe Eurozone"

2010-10-02T17:12:00.001+02:00

by Edward Hugh: Barcelona

One of the worrying things about the handling of the current European crisis is how many of those responsible for taking the decisions seem to view the Eurozone in a way which is every bit as rigid, timeless and dogmatic as the thinking of those old school scholastics whom Galileo, in his time, found himself battling against. Rather than facilitating a dialogue, and a free and open discussion, the guardians of fortress euro seem to want to keep the doors slammed tight shut, just in case any strange and unwanted ideas should inadvertantly slip in without them noticing.

Take the issue of Eurozone aggregate data. Treating the countries that constitute the bloc as one homogenous entity seems to have become a sort of shibboleth which it is impossible to question, even though it is patently evident to all concerned that there are often enormous differences between the economy of one member country and another. Inflation is the prime example. What seems to interest members of the ECB Governing Council when they have their monthly meeting is that somewhat abstract entity, the average EU16 inflation rate, while what is obviously interesting to follow from a policy point of view (just look what happened to Ireland, Spain and Greece in the years before the crisis - see Spain chart below), is the degree to which inflation rates in individual countries diverge from the mean.

Another example would be current account balances (see chart below). Eurostat publishes data for the EuroArea 16 on a monthly basis, but I think I am right in saying they never publish the national-level breakdown (certainly I have never seen it, and that hasn't been for want of trying). But, of course, now we find ourselves with a whopping set of internal imbalances between those countries running large surpluses and those with large deficits - which the financial markets are becoming less and less willing to fund - and no one seems any too clear about what to do to restore the balance. But how were the imbalances allowed to build up in the first place? Did they creep up on us by stealth, or was no one really looking?

Exactly the same issue arises with the national breakdown of bank borrowing from the ECB. As if living in a theoretical cocoon, decision makers at the ECB move forward in way which makes them seem completely impervious to the problems posed by the way banks in one country are more dependent on funding than are those in others (M Trichet repeatedly refuses to answer questions on this kind of issue at the monthly press conference) and hence remain walled-in from the issues which actually exist in the real world which surrounds them. When pressed they simply state that there is no problem since an EU country is in principle just like a US state - try telling that to Ireland or Greece. Or try telling it to German voters when they are asked to contribute to bailouts.

The issue is of course a very telling one, since basically the whole present Eurozone debt crisis has the inter-country imbalances as its backdrop, hard as the members of the ECB Governing Council may try to avoid admitting it, prefering instead to focus attention on the fiscal profligacy (of which, naturally, there has been a good deal) of the national members state governments. In other words, the problem is not of their making, oh deary me no!

Rivers Of Liquidity Here, Credit Drought There

National divergences in bank lending constitute another very good case in point. Despite the fact that the current crisis has become known as a Sovereign Debt One, it isn't always fiscal spending and public sector debt which lies at the heart of the problem. In fact, private sector debt is often as much of an issue, and the private sector in some EuroArea countries is heavily indebted, while that in others is not. It is important to discover who is who here, and to distinguish between them, since if you don't it will be impossible to decide prescisely which kind of policy mix is appropriate in each and every case (but, of course, our modern scholastic dogmatists will tell us there are no such things as "cases" here, and continue to insist there should be no distinction between countries at the level of policy). Yet just when you need the fine grained detail, what you get are more aggregate numbers and a bunch of platitudes which really tell you very little.

Thus, in the August edition of their publication "Monetary Developments In The Euro Area" we learn from the ECB that bank lending to euro-zone businesses increased in August by €17 billion as compared with July, a rise which more than reversed the €11 billion decline in July over June. What this increase meant was that the annual rate of decline in corporate borrowing was only 1.1% in August versus a 1.4% annual drop in July. That lending to corporates is falling less rapidly is good news, but it is still falling on an annual basis.

Aggregate lending to households also picked up, rising €14 billion during August compared with a €5 billion monthly increase in July. This lead the annual rate of growth to rise to 2.9% from 2.7% in the previous month, which produced a lot of "at last" type comments in the press. And putting the two numbers together, we find the annual rate of growth in loans to the entire private sector was up at 1.2% in August from 0.8% in July. Relief all round, surely, since we are going the right way.

Unfortunately nothing is ever so simple, and once we start to dig down we find large and significant disparities - disparities which may well produce monetary policy decision conflicts for the ECB in the months to come - hidden away in the aggregates. In France, for example, lending for house purchases was up an annual 6.5% in August, and indeed over the last three months such lending rose at a 7.9% annualised rate (ie lending growth for housing is accelerating), while in Spain total house lending was only up 0.6% on the year (in July, we don't have the August data from the bank of Spain yet, but it won't be very different).

When we come to total lending to households we find the pattern repeated, since this was up 5.4% in France in August, and only 0.5% (in July) in Spain.

And when we come to corporate borrowing, this was up an annual 0.4% in France in August, while it was down 1.9% in Spain (in July).

But then, you may want to ask, at the end of the day just why would anyone in Spain want to take on more debt? Since the Spanish stock of corporate debt is around 1,300 billion euros, while the French equivalent is only 771 billion euros (and the country is about half as big again as Spain), French corporates could certainly take on some more debt (if circumstances like market and investment needs warranted) but Spain's heavily over-indebted corporates simply need to pay their debt down. In the context of Spain's shrinking economy, more credit for Spanish corporates simply means more indebtedness and more interest-roll-up loans of the kind that "gather no loss" (at least at the balance sheet level), hardly a desireable development at this point.

Evidently I have taken the two polar cases here, borrowing in Italy and Germany is much weaker than in France, while the situation in Ireland, Greece and Portugal will look more like Spain. But this is part of the point, France is the one large EuroArea country where domestic demand still has real life to it (for a variety of reasons it wasn't blown out by a bubble during the last round) but for just that very reason it would be absolute madness to turn the goose that can still lay golden eggs into some kind of "foie gras" by feeding it up with massive doses of liquidity it evidently doesn't need.

Looking at the inflation differential between France and the Eurozone average matters aren't getting out of hand yet, although French inflation is above the average in a way in which it has not been before, and the situation now requires careful monitoring.

Forward looking inflation expectations have risen in France in recent months, but they seem to a stagnated of late, so again, at this point there is no need to panic.

But the situation is one where - now what is the expression - "extreme vigilance" needs to be exercised, since naturally there is no reason why a country that didn't have a bubble last time round won't develop one next time. So perhaps one of you journalists who attend the post-meeting press conference might like to ask M Trichet whether this is the kind of approach he has in mind, and what policy options are open to him should the worst case scenario (on the upside) really start to materialise. In the meantime, all I can do is shrug my shoulders and mutter under my breath "ma eppur si muove".

Global Manufacturing, France Outperforms, As Spain Continues To Flounder

2009-11-03T15:15:00.000+01:00

Well, it is not as if I relish rubbing salt into old wounds, but this quote from the latest piece by Ben Hall in Paris and Ralph Atkins in today's Financial Times is just too good to resist.

French manufacturing output rose at its fastest rate for nine years, according to a survey on Monday, confirming that France has become the economic powerhouse of continental Europe. Purchasing managers’ indices for manufacturing showed France performing significantly better than the continent’s other main economies – thanks to robust domestic demand.

Plenty of food for thought in this paragraph it seems to me. As foreshadowed in this earlier post, it is the French economy - and not the German one - which is rebounding sharply, and this seems to be for essentially three reasons:

i) there is still life in domestic demand, due to the fact that demographics are good, and lending to households (at an average rate of increase of 11%) was a lot less during the last boom than it was in the bubble societies (20% per annum in Spain and Ireland

ii) France's more favourable demography means that the French government has more space for fiscal stimulus (when compared with Germany) which means the "cash for clunkers" can roll on a bit longer.

iii) the combination of these above two factors means that stimulus actually can work, since it can fire up domestic consumption which is not already dead on its feet. That is, the situation is a win-win one in the classic sense (although, as I was arguing at the end of last week, the ECB will now need to do some pretty adroit monetary footwork if it wants to avoid firing up an asset bubble in France, to follow hot on the heels of the one which has just deflated in Spain.

As Jack Kennedy, economist at PMI survey organisers Markit put it:

“The strong recovery in French manufacturing continued in October, with output rising at the fastest pace for nine years. While some of the current strength reflects a rebound from the extreme financial crisis, it nevertheless offers further evidence that the France is towards the front of the pack among developed economies in emerging from the downturn. Domestic demand remains the key driver of growth as confidence continues to recover.”

Climbing The Tourmalet

The current recovery could be conceptualised as a group of Tour de France cyclists set on scaling the slopes of the notorious Tourmalet. One group of riders - mainly emerging economies like China (current PMI 55.4), Brazil (53.7), India (54.5) and Turkey (52.8) are out in front, with just two developed economies having "escaped" from the main group to try and catch them, France (55.6) and Sweden (56.7).

Then comes the main group, who continue to show a modest recovery, howevering around or even (at last) somewhat over the 50 point break even mark (Germany (51), the US (55.7), Japan (54.3), the UK (53.7), the Netherlands (50.5), Austria (51.1), etc). In Eastern Europe, the Czech Republic (49.8) and Poland (48.8) though still weak continue to gain ground, while the Russian team this month unexpectedly had a puncture, and dropped back into contraction territory (49.6), after registering growth in September.

And then come the stragglers lead by Italy (which is peddaling furiously, but - with a PMI of 49.2 - doesn't seem to ever quite make it over that critical 50 mark, oh well, next month perhaps),followed closely by Hungary (48.2), Greece (48), Ireland (48), South Africa (47.8) and of course, in last place, I think the rider is now so weary he is getting off to walk the bike up the hill, comes poor old Spain (46.3), where more or less predictably, the contraction continues. In particular Spain stands out as almost the worst case scenarion now, with a manufacturing sector which continues to bleed jobs in a country where no one seems to have any serious proposals about what to do except wait in the hope that things might get better eventually, and of their own accord. The sky in front with always be clearer mañana, of course.

Italy

Commenting on the Italy Manufacturing PMI survey data, Andrew Self, economist at Markit said:

“Italian manufacturers reported that their recession which has spanned eighteen months finally ended in October, two months behind the Eurozone as a whole. Production rose for the first time since March 2008, driven by a marginal return to growth of new orders. Although the October survey represents a step in the right direction on the road to recovery, weakness persists which suggest that a sustainable upturn is by no means guaranteed."

Hungary

Hungary's manufacturing purchasing manager index dropped 0.8 percentage points to 48.2 points in October, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM). The October reading suggest the steady improvement that started in the spring may now have come to a halt.

Greece

The seasonally adjusted Markit Greece Purchasing Managers’ Index fell marginally to 48.0 in October from 48.5 in the previous month. The latest reading signalled another slight deterioration in operating conditions across Greece’s manufacturing economy.

Commenting on the Greece Manufacturing PMI survey data, Gemma Wallace, Economist at Markit said:

“The hope raised in August of an imminent recovery in Greek manufacturing production has dwindled somewhat over the past two months, as the PMI has sunk back into negative territory. Nevertheless, the headline index continued to signal only a slight weakening of the business environment. Additionally, almost all of the surveyed variables are improved on their twelve-month averages – in most cases noticeably so. These are clear signs that progress has been made and therefore show that the sector is on the right path to stabilisation and recovery, even if it has not quite got there yet.”

Ireland

In Ireland the October data indicated that, while operating conditions at Irish manufacturers continued to deteriorate during the month, the sector moved a step closer to recovery. Both output and new orders fell only slightly, and purchasing activity decreased at a markedly slower rate. The seasonally adjusted NCB Purchasing Managers’ Index rose to 48.0 in October, from 46.6 in the previous month. This signalled that the rate of deterioration in business conditions eased to the weakest since February 2008.

Commenting on the NCB Republic of Ireland Manufacturing PMI survey data, Brian Devine, economist at NCB Stockbrokers said:

“The output and new orders components very nearly breached the sacred 50 mark in October. New export orders did however fall away marginally after breaching 50 last month. The fall in new export orders reflected sterling weakness which is continuing to squeeze the manufacturing sector. With UK exports under pressure it is a welcome sign that the US economy posted impressive GDP growth in Q3, even when account is taken of their scrappage scheme. With global economic activity gathering momentum we are still hopeful that the Irish economy will begin growing in Q4 of this year and the latest PMI was comforting in this regard.”

South Africa

South Africa’s purchasing managers’ index rose to its highest level in 16 months in October as the country’s first recession in 17 years eased, according to the monthly report from Kagiso Securities. The seasonally adjusted index increased to 47.6 from a revised 45.9 the month before. The index has been below 50, which points to a contraction in output, since May 2008.

Spain

Operating conditions in the Spanish manufacturing sector continued to deteriorate in October. Output fell further over the month, while new orders contracted at the sharpest pace since May. Supplier lead-times lengthened for the first time in nineteen months.

The seasonally adjusted Markit Purchasing Managers’ Indexcontinued to signal a marked decline in overall business conditions, posting 46.3 in October. Operating conditions have worsened in each month since December 2007. Output decreased modestly in October as the wider recession in Spain continued to impact negatively on demand. Production has now contracted in twenty of the past twenty-one months.

Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker, economist at Markit, said:

“Spain's recovery continues to lag the upturn seen across the Eurozone as a whole, and a steeper contraction of manufacturers' order books in October will be of particular concern as it points to a further delay to any prospects of stabilisation.Competition is so intense that firms are being forced to slash prices, despite their raw material prices increasing. The stabilisation of unemployment in the third quarter signalled by official figures is likely to be only temporary with PMI data continuing to show considerable falls in employment in the manufacturing sector as firms seek cost cuts.”

Global Improvement - But Watch Out For The Stragglers, And Those Overly Dependent On Exports

So, as JPMorgan say in their Global Manufacturing report, the Global Manufacturing PMI hit a 39-month high in October, and at 54.4 posted its highest reading since July 2006. The PMI has now remained above the neutral 50.0 mark for four successive months. But while the general picture is one of solid, if modest, growth, the group of stragglers at the back of the pack (to which would could add names like Latvia, Portugal, Romania, Finland, and Ukraine, where PMI surveys do not currently exist) point to potential problems further on down the line in 2010.

Also of concern is the way the index in export dependent countries like Germany and Japan (both suffering the added impact of having a high currency following the ongoing dollar weakness) continue to struggle for air. This is more apparent in the German than the Japanese case at this point, but the survey organisers specifically highlightend the way in which survey respondents in Japan are already reporting a lack of "bounce" in export orders, and this once more serves to highlight the weak spot in the current recovery picture - where are all the customers for all those exports eventually going to come from.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said:

“October’s Japan Manufacturing PMI fell for the first time in nine months, by 0.2 points to 54.3. It remains above the key dividing line of 50.0, indicating that production activity continues to recover, but suggesting that the pace of improvement is slowing. The New Export Orders Index, a leading indicator of Japanese exports, fell 2.5 points to 51.6. Although this is the fifth consecutive month in which the figure has been higher than 50.0, the October reading suggests that the pace of improvement has obviously slowed. An improvement in export demand was the main factor behind the rebound in Japanese manufacturing output. Therefore, we think that the strong rebound in production activity in Q2 and Q3 now looks likely to run out of steam from 2009 Q4.”

This final point, along with the negative impact that problems among the "stragglers" may present for the main group later on up the hill suggests, to me at least, that while many emerging markets remain strong, we will almost certainly not see anything resembling a "V" shaped global recovery, and especially not in the OECD countries. As far as I am concerned this hypothesis can already be safely discarded.

A New Spectre Is Haunting Europe, A Spanish One

2009-10-31T09:00:00.000+01:00

A spectre is haunting Europe, but this time it is not the spectre of revolt by the popular masses, or even one of yet another wave of bank bailouts. No, the spectre which is currently stalking the corridors of Europe's most prestigous institutions is one of a Spanish economy which stays on a flatline while Europe's other economies, one by one, start to struggle back to life. And the main reason that this particular ghostly image is giving everyone so many sleepless nights is because Europe's current institutional structures, and especially the monetary policy tools available at the ECB are scarcely prepared for such a nighmare eventuality.

France Is Recovering, And The Rebound Is Robust

First it was just a rumour, then it was a possibility, and now it has become a reality - some of Europe’s economies are springing back into life. But only some. It all began quietly, with a barely noticeable 0.3% quarterly growth in French and German GDP in the second three months of this year. France and Germany will have maintained their modest growth into the third quarter , while Italy has now joined them, leaving only Spain among the Eurozone big four, registering yet another quarter contraction, and, more importantly, showing no evident sign that an early return to normal activity is anywhere near to the horizon.

In fact Spanish gross domestic product fell 0.4 percent quarter on quarter in the third quarter following a 1.1 percent drop between April and June , according to the Bank of Spain monthly bulletin. Spain's GDP also contracted 4.1 percent year on year in the quarter, after a contraction of 4.2 percent in the second three months.

'This is the least pronounced contraction since the beginning of the recession ... and this improvement is linked to state-backed measures with a temporary effect,' the bank said.

To this government stimulus effect, I would also add the net trade effect which is being felt as a result of the strong fall in imports, and the consequent closing of the current account deficit. With imports falling faster than exports (on an annual basis) the net impact is positive growth in the headline GDP number, and the Spanish CA deficit was closing very rapidly indeed in the third quarter (see chart below).

The impact of the stimulus package can also be seen in the seasonally adjusted unemployment numbers supplied to Eurostat by the Spanish Statistics Office (INE). Unemployment (which hit 19.3% in September - see chart below) has been rising continuously since mid 2007, but the sharpest increases were registered during the fourth quarter of 2008 and the first quarter of 2009.

It is very hard to see any real difference in the trend rate of increase between the second and third quarters of 2009, and we should expect this trend job attrition rate to continue until it once more accelerates under the impact of either the government being unable to continue funding the stimulus, or the banking sector having a financial crisis (possibly induced by someone being forced into trying to sell some of the housing units they are accumulating only to discover that there are no buyers, since the market is effectively dead).

Life, Unfortunately For Spain, Is Elsewhere

But for all our preoccupations growth in 2009 is now no longer the issue. All eyes are gradually moving towards the outlook for 2010, and it is here that those little red lights have suddenly started flashing over at the European Central Bank.

And the problem is a real and growing one, since according to a series of reports which have been published during the last week, while activity in the export dependent German economy remained very fragile, the French one has really starting to hum. The first sign of this came on Tuesday, with the initial reading for the October Purchasing Manager Index which showed that while the Eurozone economy in general entered the fourth quarter on a strong note, with growth accelerating in both manufacturing and services sectors, the private sector in France started to earn alpha grades by clocking up a third successive month of accelerating growth, leaving us with the impression that France is now seeing its steepest output expansion in nearly three years.

Then on Wednesday the ECB presented its monthly bank lending data, which showed that lending to the euro area private sector shrank by an annualised 0.3 percent in September, the first such contraction since the series began in 1992. But looking a little more closely at a lending activity on a country by country basis, we find that while lending continues to contract in Spain, in France the credit cycle has turned, and indeed lending to households is now once more rising steadily (see chart below), indeed it never fell below an annual 4% rate of increase and the annualised quarterly growth rate in lending has been rising since the end of the first quarter.

That is to say, credit is once more starting to flow freely round the French economy, while here in Spain banks continue to accumulate reserves, lending generously to the government, while money for struggling small companies and for young people looking to buy homes is hard to find. What is more, if we look at the chart below (which was prepared by Dominique Barbet and Martine Borde for PNB Paribas) we will see that the stock of unsold new homes – which was in any event never very high in France, maybe 100,000 in the spring – is down by 20% as sales steadily pick up again, while here in Spain we continue to play a guessing game to decide just how many (more than a million surely) such properties there are here, and the number is growing, not declining, since real new sales to private individuals (as opposed to newly completed properties contracted two years or so ago, or exchanges between developers and banks) are almost non existent at this point. Everyone knows prices will fall further, and are waiting for them to go down.

Then on Friday we had the key piece of information, which confirmed what many of us already suspected, since Markit PMI data for October retail sales made plain the presence of very divergent trends across the Eurozone, with ever more robust growth in France contrasting with falling sales in Germany and Italy. As Jack Kennedy, economist at survey organisers Markit Economics said “While the sense of growing optimism should be treated with some caution – it appears the increase in sales was also supported by widespread discounting and the continuation of the government’s car scrappage scheme – the outperformance of France relative to Germany and Italy offers further evidence that it is France that is leading the Eurozone recovery.”

And here, with this very outperformance comes the problem, since the ECB policy rate will be set to target average eurozone inflation, which will certainly be lower than inflation in France, and possibly significantly lower. Which means the ECB policy rate will be below the one which the French economy will, in reality, need.
Between 2000 and 2008 the structural dynamics of the Eurosystem were different from now. Spain was the "exceptional student", with above-average growth, and inflation which was consistently over the Eurozone average, and for long periods above the ECB policy rate. This had the consequence, of course, that French inflation was nearly always below the average. Now things have changed. We are coming out of recession with a eurozone divided into three groups. French growth is becoming robust, while Germany and Italy are dependent on exports and just keeping their head above water. Spain, on the other hand, fails to recover and continues to contract. This is what makes the current situation critical, since starting in 2010 France will have an inflation rate over the EU average, and in all probability over the ECB interest rate. Which means that if something isn't done, and soon, to force the situation in Spain, and produce a recovery, France will have negative interest real rates during a sharp economic rebound, with all the risks that that implies.

Only last Wednesday Norway became the first western European country to raise interest rates since the start of the financial crisis after its central bank reported finding “signs of renewed growth” in the global economy. Central bankers from across the global, from Washington, to Sydney, to Delhi and to Oslo are all now busily telling us they are going to take increasing account of future accelerations in asset prices in an attempt to avoid repeating policy mistakes that are presumed to have inflated two speculative bubbles in a decade – and left the entire Spanish economy in a lamentable state. If France had its own monetary policy I have no doubt La Banque de France would be itching to follow the Norges Bank and raise rates, but there is one small problem, La Banque de France has no capacity to decide on monetary policy in this way, and herein lies the heart of what is now Europe and the ECB’s greatest dilemma.

Beyond The Consensus On European Bank Credit

2009-10-27T15:58:00.001+01:00

Well, I never thought I would have to wait very long to get some confirmation of my last post on things that could go bump in the night in France, but even I wasn't expecting confirmation of what I was trying to get at so quickly. Now, according to Frank Atkins in The Financial Times this morning:

The eurozone has reported the first year-on-year fall in bank lending to the private sector, strengthening the case for the European Central Bank to maintain its ultra-loose interest rate policy. The latest eurozone credit statistics indicated lending had been scaled back at an unprecedented pace, even though signs have become stronger that the 16-country region’s economy has stabilised.

What are we talking about here?

Basically bank lending to the euro area private sector shrank by an annualised 0.3 percent in September, according to the European Central Bank's monthly report, making for the first contraction in lending since the series began in 1992. In fact, as Frank Atkins points out, there is some positive gleem in the data, since month-on-month there was €14bn pick-up in lending to households in September. Nevertheless lending to households was still 0.3 per cent lower than a year before. That compared with a year-on-year contraction of 0.2 per cent in August. However, before we start talking about whether to put a positive spin on the tealeaves we should make ourselves awar that this entire way of reading things is deeply problematic, since it ignores two vital points (which is why I head this post "beyond the consensus", since from time to time you can read things here on this blog that you normally won't even find in the analyst surveys):

i) when you get near turning points inter-annual data becomes increasingly inadequate, and hence we now need to follow quarterly and even monthly data, or we will miss the turn.

ii) aggregate data masque the big differences we have between the different euro area economies, and this is how Spain and Ireland got into the mess they are in. The big news of the moment, I would argue, is that the credit cycle has clearly TURNED in France, as I will show in the accompanying charts below indicating quarterly annualised movements. In other countries (and particular Spain) the downward drift continues. So basically relying on the average number hides a multitude of sins, as it did last time round when Spain got into the mess it is now in, and this is one of the things I think we should be learning this time round, since if not,..................

The French Credit Cycle Turns

The chart below (which comes from the Bank of France, based on data to September) shows total credit to the private non financial sector. As we can see, on a year on year basis, the rate of credit increase continues to fall (thick blue line). But if we look at the three month annualised rate, we will see that this rebounded after June (narrow black line). What I interpret this to mean is that the credit cycle in France has now turned, and looking at the interannual data you miss the bottom. This finding is pretty important I would say.

Corporate borrowing (SNF) has also bottomed, although even on a quarterly annualised basis it is still negative. Even corportate borrowing should turn positive in the next quarter, and it will be this that should allow the government to take the hand of the "G" button and start to rein-in the fiscal deficit, as win-win growth and inflation dynamics start to set in. But what this also will mean is that the ECB, at least in the case of France, now need to start take off the ultra-loose monetary policy. What a dilemma!

Household credit growth never even reached negative in France, and is now clearly on the rebound too, and with it the French housing market. (Menages in French is households).

For fuller explanation of the deep significance of having the credit cycle turning in France significantly ahead of the rest of the euro area see The French Rebound Continues In October While Germany Moves Sideways.

The French Rebound Continues In October While Germany Moves Sideways

2009-10-27T08:30:00.007+01:00

Whoever would have thought that some people once called economics the most dismal of sciences? Certainly, as the current crisis goes on and on, those of us who consider ourselves to be economists scarcely are able to find the time to squeeze in a dull moment, even here and there. But even at a broader level, interest in that most dismal of dismal topics - the theory and practice of central banking - seems now to fire up levels of enthusiasm here in Spain that make even the appetising prospect of a forthcoming Real Madrid-Barça football match pale in intensity. Even if it is the case, I have to admit, that the everyday Johnny (or Jill) come lately sitting in the bar still - truth be told - prefers the sports columns of the daily newspapers, or the lacivious details of the latest romantic adventure of one of the rich and famous to a careful perusal of the detailed minutes of the last policy rate setting meeting over at the central bank.

The reason for the sudden and unexpected upsurge in interest should, I would have thought, be obvious - since with 85% of Spanish mortgages being variable (and thus determined by the ECB policy rate), and Spain's economy sinking into an ever deeper pit, the impact of the coming decisions (or even the hints at possible future decisions) have entered peoples lives like never before. And this is doubly the case in an environment where - as Bloomberg inform us this morning - central bankers from across the global, from Washington, to Sydney, to Oslo are likely to take increasing account of future accelerations in asset prices in an attempt to avoid repeating policy mistakes that are presumed to have inflated two speculative bubbles in a decade, culminating in the worst financial crisis since the Great Depression.

By way of illustration for their feature story the Blomberg reporters single out the prime example cases of Norway and Australia, countries whose recent stronger than average inflation and growth performance is now so well known to regular investors for the mention of their name in such reports to have become a mere commonplace, with the respective currencies being eagery purchased to the sound of hearty lipsmaking at the thought of all the juicy carry which lies ahead. Personally though, had I been doing the writing, I would have chosen a rather different example, one much nearer to the heart of Europe (and thus a little closer to my own) - France.

And why France you may ask? Well quite simply because the French economy is now plainly and evidently on the mend. That is the big, big news which can be gleaned from last Friday's Flash Markit PMI readings (see detailed breakdown below). Now those who regularly follow this blog will know that this seemingly unexpected leap into poll position hardly comes as a surprise to me, since I have long been arguing that the French economy would emerge as the strongest among the EU economies from the present deep recession, and some of the theoretical justification for this view can be found in this post here, while an earlier piece from Claus Vistesen in 2006 also gives an illustration of how we might conceptualise the problem.

So one epoch ends, and another begins, inauspicious as the beginnings may be. To summarise briefly the argument which will be presented below, there is both good and bad news here, since this early and isolated recovery in France is bound to create difficulties of the "exit thinking" kind for policymakers over at the ECB. The most pressing of the problems will concern what to do about containing French inflation if exit dependency in Germany means that a full recovery there remains out of reach, while Italy languishes where it has always languished and Spain's seemingly intractable difficulties only increase. In other words, what will happen if - as seems obvious - the eurozone economies are in fact diverging, and not converging, and the divergence far from reducing is in fact increasing.

As we will see in the charts which follow the long term decline in the GDP share of French manufacturing, which is closely associated with the steady opening of a trade deficit there, poses special threats and problems for ECB monetary policy. This long term manufacturing decline and growing external deficit are, in my opinion, the tell tale first signs of larger structural problems to come should inappropriate monetary policy be applied too hard for too long. That is to say France is well positioned to get a distortionary bubble next time round (of the exactly the kind the newly vigilant central banks should be at pains to avoid, and indeed precisely the bubble they successfully avoided last time round) unless the ECB and the French government are very clever and very agile indeed.

Above-par Inflation Looming Just Over The Horizon

In essence the return of growth in France will be welcomed with open arms across the euro area, since with it comes the prospect of opening up a larger French current account deficit and this will, of course, clearly help soak up all that newly found need to export which exists elsewhere in Europ (and especially in the South and the East). But if this should be the fate which befalls an unsuspecting French citizenry, and living in a Spain which has already been processed along this very same pipeline, then all I can say is "heaven help them" for what will then follow.

Again, all the early warning signs are there, including the prospect that France will begin to sustain above eurozone average inflation starting next year, and this will be the first time - as can be seen in the chart below - this has really happened on any sustained basis since the euro was introduced.

In fact, if we look at the second chart, which is only the above one with the reverse overlay, we can see that French inflation really only peaked its head above the average in late 2003/early 2004, and the overshoot was not that substantial.

This time things could well be very, very different, and the big change here is of course a direct result of what has just happened to Spain. Since given that Spain has now been catapulted from a high to a low growth (or even negative growth) mode, France has been ramped up the euro league table, moving from Mr Average to Monsieur Outperform, and this will have the consequence that the ECB policy rate - which will, remember, target eurozone average inflation -will be below the one which the French economy will, in reality, need. What this will mean in practice is that there is a real danger the French inflation rate will be above the policy rate - that is that negative interest rates will be applied. As we can see in the chart below, negative interest rates were applied to the Spanish economy between early 2002 and late 2006, and we all know what happened afterwards. With the return to growth French inflation is likely to rebound, and an annual rate of headline consumer price inflation of between 1.3% and 1.5% seems not unrealistic, which means, should the ECB not start to raise its refi rate early next year then France will be rebounding strongly under the twin tailwind effect of significant fiscal stimulus AND negative interest rates.

So France is about to become the ECB's stellar pupil, but looking at what actually happened to the previous prize students (Ireland and Spain) somehow I doubt that those responsible for running things at La Banque de France and the Elysee Palace will be jumping up and down with joy at the prospect. The bottom line then is that lots of difficult decisions are now looming for European policymakers - assuming they are sharp enough to spot them at this point.

Note - the next section is essentially a detailed breakdown of this month's Flash PMI data (the flash historically bears a reasonably good resemblance to the final data). If you are not especially interested in such detail you may be well advised to glance at the charts and skip to the section - France, Not Spain, Is Different!.

Eurozone Composite PMI

Summary:

Flash Eurozone Composite Output Index(1) at 53.0 (51.1 in September). 22-month high.

Flash Eurozone Services Business Activity Index(2) at 52.3 (50.9 in September). 20-month high.

Flash Eurozone Manufacturing PMI(3) at 50.7 (49.3 in September). 18-month high.

Flash Eurozone Manufacturing Output Index(4) at 54.1 (51.7 in September). 23-month high.

The Markit Flash Eurozone Composite Output Index, based on around 85% of normal monthly survey replies, rose from 51.1 in September to 53.0 in October, registering an increase in private sector output for the third successive month and the strongest monthly gain since December 2007.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

“The flash PMIs indicate that the Eurozone economy has entered Q4 on a strong note, with growth accelerating in both manufacturing and services. The data are consistent with GDP rising at a quarterly rate of around 0.4% in October. Reassuringly, job losses also slowed, and forward-looking indicators such as service sector confidence and manufacturing order-to-inventory ratios suggest that the labour market could stabilise early next year.”

Employment in the Eurozone fell for the sixteenth successive month, even if the rate of job loss eased compared to September. The rate of decline is much slower than that seen in the spring but remains high by historical standards. Both manufacturing and services saw reduced rates of job losses, though the former continued to see the sharper rate of job shedding, despite seeing the smallest cut in headcounts for a year.

Growth was driven primarily by manufacturing, where output rose for the third month running and new orders showed the strongest gain since August 2007. Despite the recent strength of the euro, new export orders showed the largest rise since January 2008, but the rate of growth remained very subdued.

Activity in the Eurozone services sector meanwhile rose for the second month, expanding at the sharpest rate since February of last year, though the rate of increase remained modest and continued to trail that of manufacturing.

German PMIs Dissapoint

Key points:

Flash Germany Composite Output Index(1) at 52.6 (52.4 in September), 2-month high.

Flash Germany Services Activity Index(2) at 50.9 (52.1 in September), 3-month low.

Flash Germany Manufacturing PMI(3) at 51.1 (49.6 in September), 16-month high.

Flash Germany Manufacturing Output Index(4) at 54.9 (52.8 in September), 17-month high.

Output levels in the German private sector economy continued to expand in October, led by the strongest rise in manufacturing production for seventeen months. Service sector business activity also increased again, but at the slowest rate in the current three-month period of growth. The seasonally adjusted Markit Flash Germany Composite Output Index, which is based on around 85% of normal monthly survey replies, rose fractionally from 52.4 in September to 52.6. The index has now registered above the 50.0 no-change mark for three consecutive months, yet the rate of expansion has remained extremely modest.

Commenting on the Markit Flash Germany PMI survey data, Tim Moore, economist at Markit said:

“The German economy started the final quarter of the year in growth territory, with the manufacturing sector the main driver of expansion. Manufacturing firms posted the fastest rise in new orders since August 2007 while employment fell more slowly, contributing to an above-50 Manufacturing PMI reading for the first time in 15 months. Meanwhile, service providers saw only a modest improvement in activity as demand continued to recover only gradually in the sector.”

Signs of excess capacity in the German economy persisted in October, despite solid rises in output and new business. Latest data indicated a further drop in backlogs of work and continued job shedding among private sector companies. Reduced staffing numbers were recorded in both the manufacturing and service sectors, primarily reflecting workforce restructuring following sharp declines in new work at the start of the year. Some firms also commented on the need to cut costs as margins remained under pressure in October.

Average prices charged by private sector firms in Germany were reduced for a twelfth month running and again at a faster pace than input costs. Manufactures and service providers both signalled marked declines in average output charges. Panellists generally attributed this to strong market competition and a resultant lack of pricing power. Meanwhile, input costs dropped only marginally in October and at the slowest rate in the current twelve-month period of decline. Data indicated that lower costs were largely confined to the manufacturing sector. Those reporting a reduction in purchasing costs frequently commented that subdued demand for raw materials had contributed to successful price negotiations with suppliers.

In the manufacturing sector, higher levels of private sector business activity were driven by a further solid expansion of incoming new work. The latest increase in new business was the strongest for a year-and-a-half. The manufacturing sector continued to lead the way, as new order volumes rose at the fastest pace since August 2007. This was supported by a robust increase in new export orders, with a number of firms pointing to stronger demand from China and Eastern Europe.

Meanwhile, service providers recorded only a modest improvement in new business levels in October. Anecdotal evidence suggested that clients remained hesitant to commit to new expenditure, leading to only a gradual recovery in demand. Nonetheless, service sector companies were confident regarding the twelve-month outlook for activity at their units, with 32% expecting a rise against just 18% thatforecast a decline.

French PMI - Robust Growth Registered

What stands out in this months data, however, is the performance of the French economy. The output Index, which is based on around 85% of normal monthly survey replies, indicated that growth of the French private sector was sustained into a third successive month – and at an accelerated rate. Climbing to 58.4, from 54.8 in September, the headline index indicated that growth accelerated markedly to reach its steepest in nearly three years.

Commenting on the Markit/CDAF Flash France PMI data, Paul Smith, Senior Economist at Markit, said:

“Expansion of the French private sector continued to gather pace in October, reaching its highest in just shy of three years. Output was sustained through higher gains in new business, particularly from the domestic market, although in part this was driven by continued discounting amid strong competitive pressures. While employment continues to fall, emerging signs of capacity pressures and optimism in the strength of the upturn raise hopes that job losses will dwindle over the coming months.”

Higher output was again broad-based, with both manufacturing and service sectors registering strong growth. Manufacturing output increased for a fourth successive month and at the steepest pace since May 2006. Outstanding business in the French private sector rose in October for a second successive month. In a sign of emerging capacity pressures – particularly in manufacturing – overall growth was the steepest in 19 months.

Despite rising backlogs, French private sector companies continued to reduce employment in October. The rate of contraction remained historically marked, with job losses most acute in services (job losses in manufacturing were the slowest for 14 months). Cost cutting and restructuring were noted by panellists. Input prices continued to fall in October, extending the current period of deflation to 12 months.

However, the rate at which costs declined was only modest, with manufacturing registering a net rise in their purchase prices. Inflation here was linked to higher steel and oil-related product prices. Strong competitive pressures led to another reduction in output prices during October, with the rate of decline remaining sharp. Output charges have now fallen throughout the past year.

Services activity rose at a slower pace than manufacturing output, but still - at a level of 57.8 - registered a strong gain, indeed the rate of expansion was the best since February 2008.

This Time France, Not Spain, Is Different, But Is It Really A Case Of Vive La Difference?

So French industrial production has been steadily recovering in recent months and the latest business surveys show this should continue, even if activity is still significantly (12%, much less than many other euro area countries) below its pre-crisis level. Consumer confidence has been steadily rising for over a year - even if, again, it continues to be weak by historic standards. Household consumption has also been rising, and in fact remained positive on an annual basis throughout the crisis (see chart below), and even if the potential for substantial further acceleration seems limited, this is still the key difference between France - where there is sufficient autonomous domestic demand left for the stimulus package to work - and the other euro area economies.

Why should this resilience be? Well in the first place I would single out France's rather favouralable demographics. But this alone cannot explain the situation. In addition I would add France also probably has had:

i) much better lending regulation than some of the bubble economies in the key years.
ii) no housing BUBBLE (as opposed to boom)
iii) a large population on fixed as opposed to variable interest rates for mortgages

France was also the only eurozone country who really had a more or less approriate interest rate applied by the ECB during the critical years from 2001 to 2007, so there are less structural distortions in the economy (not NONE, but less). On the other hand, as far as France's fiscal budget trajectory goes there are both long term structural and short term fine-tuning deficit issues to think about. The deficit has nearly doubled during the first eight months of this year (widening from EUR 67.6bn in 2008 to EUR 127.6bn in 2009), and although the French budget normally has a surplus in the last four months of the year, this is unlikely to be the case this year, so the deficit will undoubtedly widen further possibly reaching 7.3% of GDP (or 8.2% including social security).

The main reason for the increasing deficit is evident - the collapse on the revenue side. VAT income, for example, fell by EUR 10.4bn, or 12.0%, over the first eight months of the year. Overall total income fell 23.1% during the first eight months of the fiscal year, and although the pace of decline may slow over the whole year the government still expect the 2009 deficit to reach EUR 141bn for the central government and EUR 158bn (or 8.2% of GDP) for the government spending in general (including social security).

Since the various French stimulus packages only amount to an estimated 1.2% of GDP this means that the so called automatic stabilisers (i.e. the “natural” drift of the deficit on a no policy change assumption) account for 3.6 percentage points of the 4.8% of GDP increase in the general government deficit from 2008.

Looking forward, France's 2010 budget is based on a reasonably cautious economic forecast of 0.75% growth, following something like a 2.5% - 2.25% contraction in 2009. Despite this cautious approach there is still a considerable degree of uncertainty about the behaviour of tax income in the wake of the recession, and this is why the budget deficit is also expected to grow. On the inflation side the government forecasts an inflation rate of 1.2% in 2010, following 0.4% in 2009, but since the growth forecast is conservative the inflation outlook will be subject to upside risk, which is why I think 1.3% to 1.5% is a much more likely band.

Part of the deficit will naturally disappear as tax revenues recover. However, due to structural biases in the cost components of the budget there is still plenty of upside potential in debt to GDP moving forward - the latest forecast is for around 91% in 2013/14 - and substantial action will still be needed to lower the deficit in the years ahead. The public deficit is currently expected to fall in 2011 (from 8.5% in 2010 to 7.0%), but the numbers involved are still very large, and France is one of the best case scenarios, so this really begin to give us a picture of the severity of the downturn we have just been through. And of course we are by no means out of the woods yet.

French GDP On The Rebound, And Looking Onwards And Upwards

French GDP surprised positively with a 0.3% quarterly gain in the second quarter. Given the data we are seeing, a forecast of 0.2% quarterly growth for both the third and final quarters would not seem to be an unreasonable expectation at this point, which would mean the French economy would shrink by something under 2.5% in 2009, well below the average Eurozone contraction rate.

All the data we have seen for August and September confirm the view that the French economic environment is improving considerably, although the presence of continuing weak spots (especially on the employment front) mean real GDP growth will probably remain modest during the rest of this year.
The monthly survey of business sentiment was up sharply in September (at 92 against 89 in July). This indicator has moved even further away from its all-time low (68 in February and March), while remaining far below its long-run average.

Order books are also picking up -59 showing in September versus -68 in July. Export order books are also looking better too at -65 versus -66 in July. The consumer goods component in industrial goods orders improved markedly in September (-32 versus -37 for total orders, and -39 versus -33 for export orders), which indicates that domestic consumption spending is likely to be less depressed than it was in July and August. Likewise "capital goods" orders showed a slight improvement in September ( -68 for total and -70 for export orders versus -69 and -73 in July). If this improvement continues in October the ongoing deterioration in investment spending (see chart below) might be drawing to a close.

This improvement is also corroborated by the surge in the October manufacturing PMI. Activity in services also picked up again sharply in October as did activity in the construction sector - hence the interannual drop in GDP should be significantly under the Q2 level of 2.6% by the time we reach the end of the year.

It is also worth remembering that long term growth in French GDP has really been remarkably constant in recent times (see ten year moving everage chart below), at just a little over 2%. Previously this might have been considered rather low by many commentators, but in the light of what we have just seen happen to the "out-performers" the French result looks reasonably solid and sustainable, which means we could expect a pretty solid "V" shaped rebound in 2010 (especially during the second half) and the big danger is that excessively loose monetary conditions for the Eurozone as a whole and ongoing fiscal stimulus could send the French economy shooting upwards above its long term sustainable trend.

Industrial Output

French industrial output rose more than expected in August, rising 1.8 per cent from the previous month on the back of a surge in car production, according to new data. The monthly rise contrasted with a forecast rise of 0.5 per cent from economists and was fuelled by an 11 per cent rise in production of transport equipment, including an 18.2 per cent rise in the car component. Nonetheless French industrial output remains down around 12% in comparison with a year earlier, even though - as I keep stressing - this is considerably less than the drop in most other Eurozone economies.

Although the industrial output collapse has been a little less dramatic than in other eurozone countries, the rebound in France seems to remain largely in line with its peers. Industrial production in fact outpaced the GDP collapse in late 2008, so that it may now also be overstating the rebound.

French retail sales have been falling, but not to anything like the extent we have seen elsewhere in Europe. They were down 3.75% year on year in July.

France's construction sector also seems to be on the long road to recovery, thanks to a correction in the housing sector. A combination of lower prices and very low interest rates have boosted new home sales. Housing investment dropped over the last five quarters, losing an annual 8.7%, making for the worst recession in the sector in the last thirty years. Housing affordability has now rebounded sharply thanks to the interest rate component and a sharp fall in existing home prices (down about 10% year on year) which has allowed a rebound in new home sales and a decline in the stock of new homes for sale. To get some sort of comparison France had approximately 100,000 unsold new housing units at the end of 2008, compared with over a million in Spain. This inventory has now fallen to around 80,000.

According to the latest provisional INSEE data French household spending decreased slightly in Q3 (-0.2% q/q), despite the end of quarter rebound recorded in September (up a monthly 2.3%). Real spending was up a monthly 2.3% in September, after following a 1.1% fall in July and a 1.0% drop in August - so the long march upwards in consumption is not yet that robust. In fact the stats office data show that this September rise was mainly due to a surge in car sales. In line with a sharp rebound of new vehicles registrations (up 7.3% on the month), car sales were up by 10.2% in September over August, offsetting the falls recorded from the beginning of the quarter. Consequently, car sales were roughly flat in Q3 (down 0.1% over Q2), following a 5.7% quarterly rise in Q2.

On the other hand, general sales were down by a quarterly 2.5% in Q3, while "other manufactured products" sales, that represent more than 40% of the consumption, remain sluggish, rising by a quarterly 0.1% in Q3 following a drop of 0.1% in Q2. So at the end of the day the data tend to confirm the idea that the evolution of total spending has been largely dependant on car sales and government incentive scheme since the beginning of the year. Despite the rebound recorded in September, the stabilisation of car sales in Q3 resulted in a slight decrease of overall spending, that was down by 0.2% in Q3 when compared with Q2, following a 0.7% rise in Q2. As can be seen in the chart below (which was prepared by Dominique Barbet and Martine Borde for PNB Paribas) even while headline GDP shot down at the end of 2008 Private Consumption Expenditure (PCE) recovered rapidly due to the impact of the stimulus programme.

And as we can see in the following chart, while consumption in France has proved quite robust over the years, the manufacturing share in GDP has been declining steadily. This is, of course, quite a worrying trend. We can also see quite a clear indication of why France doesn't have the kind of problems Ireland and Spain have when we look at the construction share, since while this rose slightly between 2004 and 2007, at around 6% of GDP it was a far cry from the Irish and Spanish levels (which were twice as big at around 12%), and hence the French economy now has far less difficulty sweating down the capacity and inventory overhang.

And lastly (in this set of charts) we can see that while the trade share in French GDP has been growing steadily since the early 1990s, this increase in trade openness has also been accompanied by an increase in import penetration, and a steady widening of the trade deficit. It is this problem which could well turn critical during the next upturn if corrective measures are not taken in time.

Evidently French exports remain weak, and can in no way explain the recent recovery in industrial pooduction. The export rebound which took place in July was short-lived, and the narrowing of the deficit we have seen between 2008 and 2009 has primarily been due to lower crude oil prices. On the other hand euro appreciation is not the main reason for the poor export performance, as the deficit is wider with eurozone trading partners than with others. The drop in imports is adequately explained by the fall in domestic demand, and is not a sign of improved domestic competitiveness. At the same time the non-goods surplus has narrowed significantly, because of smaller surplus on services and the decline of the surplus on the income account. Thus while the current account deficit has narrowed somewhat, and is expected to stay contained over the next twelve months, the risk of a sharp widening in the years to come is clear enough.

A Tale Of Two Population Pyramids

Basically, a large part of the differential performance between France and Germany can be explained by comparing the two population pyramids. France has an annual population growth rate of around 0.5% while Germany has a population SHRINKAGE rate of around 0.1%. France has a total fertility rate of around 2.0, while the German one is around 1.35.

Thus the French population pyramid (above) is evidently far more stable than the German one (following), and this means that:

a) French domestic consumption is far more stable and dynamic (I would say that this by now should have attained the status of being a "self evident truth").

b) the French government debt to GDP problem, while being important, can be corrected over a longer period than the German one, since France is not ageing so rapidly. This does NOT mean that France should not be doing anything to put its house in order, clearly the underlying structural problems in the public deficit situation - health and pensions - need addressing, but France has more margin of manoeuvre to do this. The important thing is that the French administration do not put this off and off until they reach the same state of mess that the Germans are now in. France should, nonetheless be given credit for having done her homework on fertility.

Basically one look at the unstable shape of this pyramid should give us plenty of course for concern about Germany's future.

Frankly this differential situation, and its implications, has still failed to sink in in many quarers. The Economist Intelligence Unit, for example, in their recent piece - France Easy Does It (20th October 2009) - says the following:

"However, after several years of budgetary vigour Germany's public finances are now in far better shape than those of France, while the German government has secured approval of a law establishing the principle of a balanced budget in the German constitution. A persistent, large-scale asymmetry in the fiscal policies of the euro area's two largest member states could become a significant source of tension in the period ahead."

This is simply nonesense. German finances (despite the sacrifices which ordinary Germans have evidently made) are NOT in better longer term shape than French finances, and this for the reason that:

a) German trend growth (under 1%) is now significantly below French trend growth (around 2%).

b) German structural deficits related to ageing are going to be much more serious in the coming decade.

And signs of the problems this is creating are to be found all over the place. Only last week the two parties in the new German government coalition were toying with the idea of setting up a €60bn fund whose explicit objective was to cover expected welfare-system deficits over the next four years. That would have raised new government borrowing for 2009 from just under €50bn to over €90bn – but would have had the advantage that it would have made it easier for the government to fulfil a constitutional amendment passed this year, which obliges the federal and state governments to reduce their deficits year by year starting in 2011. Basically, what is the value of having a constitutional ammendment to limit the deficit, if the very next minute you start to look for ways to get around it in order to meet the needs of short term expediency?

Clemens Fuest, head of the finance ministry’s council of economic advisers, accused the incoming government of “false labelling” in claiming the special fund was just to cover welfare cost overruns. “The real reason is tax cuts,” he told the Financial Times. “The coalition has manoeuvred itself into a kind of cul-de-sac by saying on the one hand we’re going to have broad income-tax cuts, but on the other, we won’t do that by borrowing more. Of course that’s impossible.”

Rainer Brüderle, one of the FDP’s economics experts, on the other hand denied the plan was mere "trickery” and noted that special funds had been used before to finance the extraordinary burdens of German unification and the recent bank bail-out fund. The point here is not to get bogged down in the ins and outs of fiscal rectitude, but to see the stark and evident fact that the German government far from having, as the EIU puts it, secured a law which means their fiscal position is in better shape than that of French faces stark and difficult choices in carrying through what will remain a knife edged balancing act over the years to come.

The background here is that in June 2009, Germany introduced ammended its constitution by passing a law that will only allow federal deficits of up to 0.35% of GDP during normal times starting in 2016. After 2020, regional state deficits are to be abolished, while parliament can only suspend the rule in the event of “natural catastrophes or other unusual emergency situations."

The very presence of this law should give us an indication of just how critical German public finances may become. In order to comply with the law, Germany will have to implement spending cuts or raise taxes starting in 2011 regardless of whether they have weaker tax revenue, rising welfare bills, or need more stimulus measures and spending for bank bailouts.

On October 8, 2009, the German newspaper Handelsblatt reported that till 2013 Germany will have to raise taxes or cut spending equivalent to 34.3 billion euros in order to comply with the debt brake. Even if growth should be a full percentage point above the current forecasts the hole in German government finances will still stand at 29 billion euros. Therefore even if the economy improves more than expected the coalition will not enjoy ample scope with regards to public finances. (Handelsblatt; October 8, 2009)

In the end the proposal to borrow extra money this year was ditched even though a 24 billion- euro tax cut programme aimed at low and mid-level earners was adopted. Basically the "creative accounting" proposal might well have satisfied the needs of the new constitutional law, but they would not have helped with the excess deficit criteria applied by Eurostat and the EU Commission, since when the German social security system (which - remember - forms part of the government sector according to the Eurostat rules) spent the money and actually ran the deficits in 2011 or 2012, this would have been recorded as a deficit for the German public sector according to the Eurostat rules no matter when the money was borrowed. So the new government now adding tax cuts to the earlier deficits is very likely to put it in breach of the EU's Stability and Growth Pact concept of a 3-percent limit and will in all likelihood put Berlin in conflict with Brussels.

According to the most recent government forecast Germany GDP will now contract by 5% in 2009 (as compared to around minus 2.5% in France) and will the grow by about 1.2% next year. As a result net new borrowing is forecast by the latest government budget calculations to almost double next year to 86.1 billion euros from a record 47.6 billion euros this year. In an interview with Financial Times Deutschland, Jurgen von Hagen from the Institute for International Economics put it like this "Germany’s fiscal policy has been totally misguided, as it persistently ignored the inter-relationship between deficits and growth. Debt ceilings, such as the recently agreed constitutional change, do not work as they are too mechanistic, and lead to policy mistakes."

Germany's debt to GDP is estimated at 79% for 2009 and 87% for 2010, up from 67% in 2008, according to the IMF (World Economic Outlook) and on October 7, 2009, the European Commission issued a formal warning about Germany's large deficit - normally the initial step before opening an excessive deficit procedure.

To return German public debt to a sustainable path, UniCredit have calculated that the primary balance (budget balance minus debt interest payments on debt) would have to be increased by close to a full percentage point. This is equivalent to savings or additional revenues of almost EUR25 billion. To bring the debt ratio back below 60% in the next 20 years, the primary balance would have to be increased by 2 percentage points, and of course stay there (Unicredit research note, 25 June 2009)

Keeping Credit Growth In France Under Control

In this post we have covered a lot of ground. We have:

a) suggested that the whole covergence idea (that all eurozone economies where converging to a common profile) did not offer an adequate description of the actually economic processes we can see on the ground, and that, in fact, the economic profile varies widely from one country to another. It is more a question of "vive la difference"

b) examined how, in terms of the Eurozone's two largest economies - France and Germany - the paths are very divergent. Germany has an export dependent economy, which has been severely savaged by the present deep recession, and recovery is fragile (Axel Weber's expression) and will remain so until other economies recover and export growth can resume.

c) seen that while both countries suffer from important structural problems in the public finances, with debt to GDP in both cases being around 90% of GDP in 2011, in fact the country which is likely to face the more extreme difficulties over the coming decade is likely to be Germany due to the more rapid population ageing which is taking place there and the excessive dependency on exports which this produces.

d) spelt out how the ECB may well now be facing its "finest hour", as it has to rise to the challenge of adapting a one size fits all interest rate policy to a world where one size evidently doesn't fit all, and where the danger of fuelling an excessive consumer boom in one country (France) will have to be set against the risk of sending the banking system of into meltdown in another (Spain). This is clearly the banking equivalent of being stuck between a rock and a hard place new tools and new thinking will need to be developed if we are to finally steer that path between the insatiable appetite of Scylla and the never ending thirst of Charybdis.

Finally, just to make all of this very concrete, lets take a look at the different rates of new credit creation as between French and Spanish households - courtesy again of one of those very useful charts prepared by Dominique Barbet and Martine Borde for PNB Paribas). As we can see in the following chart, annual growth in total household credit in France never went about around 11% to 12% during the boom, and has now not fallen much below 3% during the slump.

In Spain in contrast, the annual rate of new household credit creation was more like 20% during the boom years, and this has steadily dropped since the start of 2007, and finally went negative in August (latest data). It is of course still falling. And this is the danger, that consumer borrowing in Spain remains weak (even as exports are lacklustre), while in France the excessively loose monetary conditions send consumers off to the banks to borrow and then on to the shops to spend.

Facebook Links

2009-06-20T12:28:00.000+02:00

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

French Business Confidence and Consumer Spending Rise In May

2009-05-27T10:32:00.000+02:00

French business confidence rose for the second month in May as record low interest rates and falling inflation appeared to be encouraging French consumers to start shopping again.. The Insee sentiment index - based on a survey among 4,000 manufacturers rose to 72 from 71 in April.

Consumer confidence also rose to a 13-month high, according to a separate gauge of consumer sentiment published today - it was up at minus 40, from minus 41 in April. The level is still, however, not far off historic lows.

French consumer spending increased in April as government incentives boosted car sales and slowing inflation helped cushion France's worst recession since World War II. Spending on manufactured goods rose 0.7 percent from March, when it climbed a revised 0.6 percent, according to the national statistics office Insee. The government offered a 1,000-euro car-scrapping incentive in December for buyers who junk old vehicles. Car sales climbed 3.7 percent last month, today’s report showed.

France's inflation rate fell to the lowest in at least 13 years in April. However, the number of jobseekers surged to 2.45 million in March, the highest in almost three months, and the government predicts a further increase as employers fire workers to survive the economic slump. France’s economy entered a recession in the third quarter and shrank 1.5 percent and 1.2 percent in the following two quarters, prompting the government last week to predict gross domestic product will fall 3 percent this year.

Eurozone May PMI Improves

2009-05-24T19:06:00.001+02:00

Well the eurozone outlook is certainly deteriorating less rapidly at this point, as attested to in the May flash PMIs - which show the pace of economic contraction slowing markedly. Purchasing managers’ indices for the 16-country euro area jumped rose significantly this month, and hit their highest level for eight months. It is important to bear in mind that the index still registered contracting economic activity, but the rate of decline fell for a third consecutive month. Chris Williamson, chief economist at Markit, which compiles the purchasing managers’ indices, said the latest readings were consistent with second quarter GDP falling about 0.5 per cent quarter on quarter, or by a 2% annual rate, well down from the 2.5% quarter on quarter reading (or 10% annual rate) registered in the first three months. Still, we are still in the realm of contraction, and Organisations such as the International Monetary Fund, the European Commission and European Central Bank forecast a return to growth only in 2010.

The eurozone economies, especially the export-led German economy, proved particularly vulnerable to the collapse in global demand after the failure of Lehman Brothers investment bank. Hopes of a recovery are based on signs that companies have run down inventories and will need to step up production to meet orders. And this, it is true, will give a short-term uplift to output (which is what we are seeing), but for this to translate into renewed expansion, the demand for inventory renewal has to provoke an increase in investment to fuel what is perceived as a future increase in demand, and it is far from clear that we are seeing this at this stage.

We do not have detailed data for Q1 GDP for the eurozone economies yet, but if we look at the evidence from Japan, investment activity slumped massively in the first three months, and there is no reason why the situation should be very different in Europe. Business investment was down a record 10.4 percent year on year in the first three months, and a massive 35.5% over the last quarter.

However, eurozone economic activity will continue to come under pressure in the months to come as the impact of the sharp contraction in activity feeds through into the labour market. And companies are likely to keep cutting spending because the decline in external demand has left factories operating well below capacity level, and semi-idle workforces can only be retained for so long. Markit said that the pace of job losses had eased this month – but only slightly compared with the record pace reported in April.

May’s eurozone “composite” index, covering manufacturing and services, stood at 43.9 in May, up from 41.1 in April, the highest since September.

The flash reading only gives details for two of the euro area's big four. The rate of decline in Germany's private sector eased to its slowest in seven months in May, and the composite index rose to 44.4 from 40.1 in April, suggesting the contraction in the second quarter will be much slower than the 3.8% slump (15.2% annualised) in the first. Markit estimated that we may be looking at something like a 0.6 decline (-2.4% annualised). The outcome may be a bit worse than this, but still a significant improvement seem certain.

The German manufacturing PMI index rose to 39.1 from 35.4 in April, while the services sector index rose to 46.0 from 43.8. The manufacturing index was dragged down by major job losses in the sector, and according to Markit "Manufacturing employment in Germany is falling at a far, far faster rate still than services...Manufacturing has really been hammered even though there was some easing in the rate of job losses in May."

The French services PMI was up at 47.6 in May from 46.5 in April, while the manufacturing sector also rose to an above expected level of 43.1 from 40.1.

At the same time it would be very premature to draw the conclusion that we are out of the woods yet. The euro hit 1:40 to the dollar on Friday, and with this level it is hard to see how German exports are going to stage a recovery with currencies like the Swedish Krona and the UK pound down something like 20% over the last year, and German companies now having to look beyond the eurzone to find customers.

Eurozone Retail Sales Contract For the Tenth Month In Succession

2009-03-30T18:33:00.000+02:00

The Bloomberg Euro-Zone Retail Purchasing Managers' Index - based on a mid-month survey of more than 1,000 executives in the euro area retail sector - rose marginally in March - to 44.1, up from 42.3 in February to 44.1 in March. This was the smallest monthly drop in the value of sales in five months, but it was still a drop, and quite a significant one, since the neutral point between contraction and expansion is 50. Still first quarter retail sales have seen an average monthly decline which is smaller than in the fourth quarter of last year (an effect of all those stimulus programmes), however sales have now fallen for ten consecutive months.

The German Sales Contraction Accelerates

Retail sales in Germany, the zone's largest economy, dropped for a 10th month in March as unemployment rose and manufacturing industry continued to grapple with a slump in export orders. The retail PMI dropped to 44.4 from 45.4 in February.

German households are cutting spending as a deepening economic slump forces companies to eliminate jobs, pushing up unemployment. The fall comes despite the decision of German Chancellor Angela Merkel to spend about 82 billion euros in measures to stimulate growth, including tax breaks and incentives to buy new cars.

“Consumers were generally unwilling to spend, while evidence of shorter working hours at local companies reportedly curtailed their buying power,” Markit said in the statement. “The overall decline may have been greater were it not for government incentives to scrap old motor vehicles, which continued to support sales in the automobile sector.”

The Italian Sales Contraction Enters Its 25th Month

Italian retail sales contracted for a 25th month in March as the country's worst recession in more than 30 years prompts companies to cut jobs, in the process eating away at consumer demand. The index was up slightly at 41.9, from 38.2 in February.

Italy slipped into its fourth recession since 2001 last year, sending the unemployment rate to a two-year high. The government has adopted around 40 billion euros in stimulus measures, but is constrained from spending more due to the high level of prior government debt. As a result the OECD forecast the economy will likely contract by 4.2 percent this year.

French Sales Hold Up A Little Better

France also saw a moderation in the rate of sales decline, with the pace easing from February's record but remaining steep. Month-on-month the index rose from 42.6 to 45.7, rounding off a first quarter that has seen the weakest sales performance in the history of the French survey. French retailers have reported falling sales in five of the past six months.

Eurozone Inflation Expectations Fall As The Output Gap Rises

2009-03-03T09:32:00.000+01:00

It’s a depressing spectacle: on both sides of the Atlantic, policy-makers just keep falling short — and the odds that this slump really will turn into Great Depression II keep rising.

In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide “case-by-case” support. That means a slow dribble of funds, with no chance of reversing the downward spiral.

Oh, and Jean-Claude Trichet says that there is no deflation threat in Europe. What’s the weather like on his planet?
Paul Krugman, yesterday

What follows here are simply a few charts to illustrate further the argument I developed yesterday as regards the significance of the deflation threat which now exists in the eurozone. The argument is that the ECB is once again being far too cautious, and risks allowing the entire eurozone to entire a deflationary cycle which may prove to be a lot harder to get out of than it was to get into. In my view the ECB should bring the refinancing rate close to zero % at next Thursday's rate setting meeting, and then explore what measures can be taken to introduce a zonewide version of US/Japan style Quantitative Easing as quickly as possible.

The key argument I am presenting is that it is a mistake to focus at this point on what is happening to energy, food and other commodity prices. The key issue is what is happening to core prices, and what will continue to happen to them as output contracts further. The other side of the coin are inflation expectations, and as we will see below these are now falling rapidly across Europe. It is very important at this point that these expectations do not get "locked in" to price fall expectations.

It is evident that the degree of economic slack in the OECD is now widening rapdily as unemployment rises and capacity utilization falls. The OECD output gap (the difference between current levels of output and some estimate of what "capacity" output could be at this point) continues to widen and is now only second in importance to the output gap seen in the early 1980s. In fact, the output gap is likely to have widened further since the OECD last made its forecasts in November 2008 (the OECD leading indicator has, for example, continued to decline since that point) but the output gaps shown for the US, the UK and eurozone in the chart below are already sufficiently pronounced to make the point quite clearly I think.

In fact, spare capacity is a phenomenon which extends way beyond the OECD, and economies throughout the world are operating at below their potential and look set to do so for both the remainder of this year and most of 2010. Global manufacturing has been contracting and global trade has collapsed. Here is the latest JP Morgan Global Manufacturing PMI.

The IMF currently estimates that the cumulative global output loss relative to potential over the period 2008-2010 will be as much as 5% (see chart below).

And inflation expectations are falling rapidly. The latest findings in the European Commission’s own consumer questionnaire show that the net balance of respondents in the UK and the Euro zone expecting prices to be higher this time next year is now at the lowest recorded level - just 2.7% and 4.1% respectively ( see chart below).

"There Is No Deflation Threat In Europe" - Jean Claude Trichet - Oh Really!

2009-03-02T13:54:00.000+01:00

He's at it again. Last year he was busily trying to worry us all that inflation was set to get completely out of hand among the 16 countries who make up the eurozone. Now the President of the European Central Bank, Jean-Claude Trichet, is hard at it on another tack and is busying himself trying to convince us that there is no credible deflation threat facing these countries. Apart from getting it wrong on both occasions, the common point here would be a certain inbuilt "inflation bias", a bias which was earlier called "the original sin of the Bundesbank" by nobel prize winning Italian economist Franco Modigliani.

"There is presently no threat of deflation," Trichet told a committee of the European Parliament on Wednesday 14 February. "We are currently witnessing is a process of disinflation, driven in particular by a sharp decline in commodity prices." ..."It is a welcome development," he said, adding that the fall in energy, and other prices should help boost struggling economies.

Apart from manifesting a spectacular lack of economic judgement, the Financial Times's Banker of the Year 2007 is now forcing us to ask the embarassing question as to just how far "out of touch" you can get with the material you are supposed to be handling and continue to hold down your job. It seems we are forced to come up with the rather worrying response, that, in the case of the principal EU institutions (remember the sad case of Economy and Finance Commissioner Joaquin Almunia), the answer is "bastante" (consideably), since a quick look at the data we have to hand shows us that Eurozone inflation is already significantly undershooting the European Central Bank’s own target (and principle policy objective) of maintaining the annual rate “below but close” to 2%. Worse, by all appearances the rate of consumer price inflation in the eurozone is now set to head straight off into negative territory.

If we look at headline HICP inflation on an annualised basis, we will find that it fell more than expected in January - to 1.1 per cent, according to Eurostat data - down quite dramatically from the peak of 2.7 per cent hit in March last year. This was the lowest level we have seen since July 1999, and a sharp drop from the 1.6 percent rate registered in December. On a month-to-month basis, prices were down 0.8 percent. The "core" inflation rate - that is consumer inflation without the volatile elements of food, energy, alcohol and tobacco - we find it still stood at 1.6%, since the biggest impact on headline inflation comes from the decline in food and energy costs. But if we look at the monthly movement in the core index, we find that it dropped by a very large 1.3% (see chart below).

Now if we come to look at the core inflation rate over the last six months, we find that the index has only risen 0.1% (or an annual rate of 0.2%). This gives us a much more accurate reading on where inflation actually is at this point in time, and where it is headed. The chart below shows the six month lagged annualised rate for the last twelve months, and the sharp drop in January is evident. If things continue like this, then the eurozone as a whole is headed straight into deflation, for sure.

Why Should Prices Continue to Fall?

So what are the grounds for thinking that inflation may be now heading into negative territory (ie that we are entering deflation right now), despite the fact that the ECB revised forecast is likely to come out at about 0.7 per cent this year and 1.5 per cent in 2010, according to estimates from Julian Callow, European economist at Barclays Capital. Well let's look at a chart produced by Paul Krugman showing the relation between the US output gap and the inflation rate.

Now as Krugman explains the figure plots an estimate of the output gap — the difference between actual and potential GDP, as a percentage of potential — and the change in the inflation rate. (Both series are taken from the IMF WEO database, for convenience, and use data from 1980-2007).

The fit, as he says, is not perfect, but the correlation is evident, and there is an implied slope of about 0.5 — that is, every percentage point by which real US GDP fall short of potential tends to reduce the inflation rate by about half a point over the course of the year. Now I am not going to advance here estimates of the present output gap in the eurozone, but we do have clear indications of a sharp and ongoing contraction in demand in the GDP numbers. Eurozone GDP contracted by 0.2% between the second and the third quarters of last year, and by 1.5% between the third and fourth quarters.

What's more the key indicators suggest that the contraction is accelerating at this point. The February Markit euro-zone composite PMI reading dropped to a record low of 36.2 from 38.3 in January. Any reading below 50 on these indexes indicates month on month contraction.

Barring some spectacular (and entirely improbable) turnaround in March it now seems likely that the Q1 GDP contraction will be worse than the Q4 2008 one, and considering (as mentioned previously) that the eurozone contracted by 0.2% in Q3 2008, and by 1.5% in Q4, then, in my humble opinion, the data we are seeing for this quarter are entirely consistent with a 2% quarterly contraction (or an annualised 8% rate of contraction). For those of you who simply don't believe that PMIs can tell you so much, take a look at Markit's own chart (below), showing the strong underlying relationship between movements in GDP and the *flash* composite PMI. The results they achieve are pretty impressive I would say.

and if we look at an additional indicator (the EU's own Economic Sentiment Indicator for the eurozone) we will see that it hit yet another low in February (see below) which again suggests that the contraction is accelerating at this point, and substantially so.

So the core HICP index is on the point of turning negative on a six monthly basis, and the situation appears set to get even worse, and our Central Bank President assures us that "there is presently no threat of deflation". So which world am I living in, or which is he?

There are further reasons to anticipate a sharp downward pull on prices from some countries in the zone (like Spain and Ireland), since they have housing and construction booms which are in the process of unwinding, and the only way they can recover the competitiveness they have lost is by conducting a sharp and significant downward revision in prices and wages (since in a currency union there is effectively no currency to devalue). The two charts below show the loss of competitiveness experienced by the Irish and the Spanish economies (respectively) with regards to the German economy since 1999 as measured by real effective exchange rates (REERs).

REERs attempt to assess a country's price or cost competitiveness relative to its principal competitors in international markets. Since changes in cost and price competitiveness depend not only on exchange rate movements but also on cost and price trends the specific REERs used by Eurostat for its Sustainable Development Indicators are deflated by nominal unit labour costs (total economy) against a panel of 36 countries (= EU27 + 9 other industrial countries: Australia, Canada, United States, Japan, Norway, New Zealand, Mexico, Switzerland, and Turkey). Double export weights are used to calculate REERs, reflecting not only competition in the home markets of the various competitors, but also competition in export markets elsewhere. A rise in the index means a loss of competitiveness.

Now the eurozone being a common currency area presents us with specific problems in the context of deflation since, as the Irish economist Philip Lane argues a member of a currency union comes up against a natural limit in national-level deflation. Thus, he argues, while a country like Ireland may well face a sustained period of inflation below the euro area average (such that it may be negative in absolute terms for a greater or lesser period of time), the situation should tend to be self-correcting since the deflation implies an improvement in competitiveness, which should generate a boost in export driven economic activity and, over time, a return to an inflation rate at around the euro area average. I'm not sure that this argument is 100% valid, since sufficient internal demand lead deflation can so effect household and corporate solvency that debt deflation can at the very least send a country off into a sizeable and significant correction (say a decade long one) before the price level falls sufficiently to generate sufficient export activity to offset the decline in domestic demand and enable balance sheets to recover. But going into all this would get pretty wonkish, so, leaving that rather theoretical point aside, lets think about a more rather concrete and immediate reason for worrying about what is happening at the present time in the eurozone, and that is the possibility that the inflation and competitiveness benchmark country, in this case Germany, may itself be about to experience an internal price deflation process which is every bit as sharp as the fall in prices which is taking place in those economies which are supposed to be correcting vis-a-vis Germany itself. That is, let's consider the possibility that through this mechanism the deflation may become eurozone wide, and relatively self perpetuating, if something is not done to break the cycle.

So, if we now go on to look at the two relevant charts below (for Spain and Ireland) we will find that in each case core indexes are falling more or less in line with the German one. In fact, both the Spanish and the German indexes are unchanged over the last six months, the Irish one is down 0.5%. At this pace (a 1% a year differential with Germany) Ireland would recover its 1999 comparative position vis-a-vis Germany in around 30 years, a rather lengthy process to say the least.

But the point here is not that prices are falling in Ireland and Spain (they have to do this) but that prices are also set to fall in Germany, and this is where monetary policy from the ECB becomes vital, since if Germany is allowed to fall into deflation then it will be extremely difficult for Spain and Ireland to "correct" (the drop in wages and prices would have to be sharp indeed) but also monetary policy from the ECB would be in danger of becoming a complete mess.

Of course not everyone on the ECB governing council shares Trichet's rosier-than-rosy view, and in a comment that offered an insight into how at least some ECB council members are thinking, Mario Draghi, Italy’s Central Bank Governor said recently that “the governing council is keeping a close watch on the real cost of money”. What he means is that, if Spain's 1.5% drop in core prices over the last three months turned into a 6% annual drop, then the real rate of interest currently being applied would be around 8%, which would constitute a very tight monetary policy in the context of Spain's worst recession in living memory.

Perhaps some readers may feel I have been unduly hard on Jean Claude Trichet in this post, but I would simply close by reminding everyone of the conclusions reached in a once widely quoted paper - Preventing deflation: lessons from Japan's experience in the 1990s, by Alan Ahearne, Joseph Gagnon, Jane Haltmaier and Steve Kamin (2002) - where the authors argued:

We conclude that Japan's sustained deflationary slump was very much unanticipated by Japanese policymakers and observers alike, and that this was a key factor in the authorities' failure to provide sufficient stimulus to maintain growth and positive inflation. Once inflation turned negative and short-term interest rates approached the zero-lower-bound, it became much more difficult for monetary policy to reactivate the economy. We found little compelling evidence that in the lead up to deflation in the first half of the 1990s, the ability of either monetary or fiscal policy to help support the economy fell off significantly. Based on all these considerations, we draw the general lesson from Japan's experience that when inflation and interest rates have fallen close to zero, and the risk of deflation is high, stimulus, both monetary and fiscal, should go beyond the levels conventionally implied by baseline forecasts of future inflation and economic activity.

As some economist or other I read is in the habit of saying "history has a nasty habit of repeating itself, the first time as tragedy and the second time as tragedy". Or put another way, here we go again. Hello, is there anyone out there?

Europe's Economic Contraction Intensifies In February

2009-02-20T14:17:00.000+01:00

Hopes that Europe's battered economies might be about to turn themselves around took another sharp knock today (Friday), as the preliminary flash reading on the purchasing manager survey signaled that activity in both the manufacturing and the services sectors are contracting at a new record pace in February.

The preliminary Markit euro-zone manufacturing purchasing managers index, or PMI, fell to a record low of 33.6 in February from 34.4 in January, while the services PMI also fell to a record low, dropping to 38.9 from 42.2 in January. As a consequence the euro-zone composite PMI reading dropped to its own record low of 36.2 from 38.3 in January. Any reading below 50 on these indexes indicates month on month contraction.

Barring some spectacular (and entirely improbable) turnaround in March it now seems likely that the Q1 GDP contraction will be worse than the Q4 2008 one. If we consider that the eurozone contracted by 0.2% in Q3 2008, and by 1.5% in Q4, then, in my humble opinion, the data we are seeing for this quarter are entirely consistent with a 2% quarterly contraction (or an annualised 8% rate of contraction). Not quite Japan territory yet, but not far behind. And for those who simply don't believe the PMIs can tell you so much, here is Markit's own chart, showing the strong underlying relationship between movements in GDP and the *flash* composite PMI. Pretty impressive I would say.

Germany's Contraction Intensifies

The German service PMI came in at at 41.6, showing the fifth consecutive month of contraction. This was a sharp drop from last months 45.2 reading, and means that the recession is now feeding through from manufacturing to services. The difficult conditions have lead service business owners to hold to the grimmest outlook in the last decade, that is since the index was started. More ominously, the recent data points to a strong reduction in the employment level.

On the other hand February saw the tiniest of upticks in the manufacturing sector, since the PMI came in at 32.2, from January's 32 , the best that can be said here is that the rate of contraction may have stabilised.

France Holds Up Slightly Better Than Most

In France, the manufacturing sector (see chart below) gave up on most of January's rebound, and the PMI fell to 35.4 from 37.9 in January, while services (see chart above) slipped to a record low of 40.1 from 42.6 in January. Nonetheless France is visibly performing rather better than Germany, and when all this is over we will have plenty of time to hold the debate as to why that has been.

France Enters Recession

2009-02-09T13:22:00.001+01:00

The French economy, which is Europe’s third largest, will slip into its first recession in 16 years in the first quarter of 2009 according to the Bank of France this morning. French gross domestic product will shrink 0.6 percent in the three months through March, following a 1.1 percent contraction in the final quarter 2008.

Basically France has steered clear of "technical" recession to date due to very slight growth (0.1%) acheived in Q3 2008. That being said, it is also the case that the French economy is certainly the "eurozone big 4" economy which is holding up best during the current crisis. Doubtless when all this is over we will spend a good deal of time talking about why this is.

French Manufacturing Contracts At Record Pace In October

2008-11-04T18:35:00.000+01:00

The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.

Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.

Panelists widely reported that a weak economic climate, poor business confidence and slowing consumer spending had taken their toll on demand, with incoming new orders falling at the fastest pace registered by the survey to date in October.

Weakness was evident in both the domestic and external markets, with new export orders also declining at a series-record rate.

Mirroring the trend for new work, production fell at the sharpest pace in the survey history during October. The latest drop in output was the fifth in consecutive months.

Faced with an excess of capacity relative to current new order levels, French manufacturers registered a series record reduction in backlogs of work during the latest period. Meanwhile, stocks of unsold goods continued to rise, albeit at the slowest pace in five months.

In line with lower workloads, firms made further cutbacks to staffing levels in October. The rate of job shedding accelerated to the sharpest since January 2002, with over a quarter of panelists signaling a fall in employment.

Reduced output requirements also resulted in a further sharp drop in purchasing activity at French manufacturers during October (a survey record). Stocks of raw materials and semi-manufactured goods contracted for a third straight month as a number of firms pursued inventory streamlining policies. Weaker demand for inputs allowed suppliers to speed up deliveries, with average lead times shortening slightly on the month.

Latest data signaled a further easing of inflationary pressure on both the input and output price measures during October. Costs rose only marginally and at the weakest rate for over three years, principally reflecting the recent retreat in oil and other commodity prices. Charges for finished goods increased at the slowest pace since January 2006, as faltering demand prompted many firms to hold down selling prices wherever possible.

Commenting on the Markit/CDAF France Manufacturing PMI final data, Jack Kennedy, economist at Markit, said: “France saw a further broad-based deterioration of operating conditions in the manufacturing sector during October, mirroring developments across the Eurozone. With many key variables at survey-record lows, the data signal an accelerating descent into recession at the start of Q4.”

The JP Morgan Global Manufacturing Index Plummets Too

The October contraction in France, while undoubtedly significant in its own right, is really only part of a more general global pattern. Indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.

The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.

"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan

Economies across the Eurozone are being affected. In Italy manufacturing activity contracted at the fastest rate in at least 11 years in October according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.

Other recent indicators from Italy have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.

Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index for what is Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.

Spain's manufacturing sector continued to shrink at a record pace in October, with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. On the PMI system any figure below 50.0 shows contraction while figures over 50.0 show growth. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.

Eastern Europe

Hungary's manufacturing industry contracted sharply in October, with the PMI dropping 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).

In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.

US Manufacturing

The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.

The BRICs

China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.

According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.

"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."

The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September

Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.

Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.

Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.

French Business Confidence Hits Lowest Level Since December 1993

2008-10-23T14:17:00.001+02:00

French business confidence fell to the lowest in almost 15 years as the global credit crisis worsened, threatening to deepen a likely recession in the euro region's second-largest economy.

An index of sentiment among 4,000 manufacturers declined to 88 in October from 91 the previous month, according to Insee, the Paris-based national statistics office. The reading was the lowest since December 1993.

The report also showed that manufacturers expect their prices to fall for a second month as crude oil and commodities costs retreat. Crude prices have shed more than 50 percent since a July 11 record of $147.27 a barrel, helping bring France's inflation rate to 3.3 percent in September from a 12-year high of 4 percent in July. Declining prices have cheered households.

Consumer spending on manufactured goods, which accounts for about 15 percent of the economy, unexpectedly rose 0.6 percent in September after a 0.2 percent decline in August, a separate Insee report showed. The increase in September left third-quarter spending up 0.7 percent after stagnating in April-June, Insee said.

Even allowing for the increase in consumer spending, Insee maintained its estimate that the French economy contracted 0.1 percent in the third quarter, meaning that France entered its first recession in more than 15 years on 1 April 2008.

Europe's Leaders Agree To A Common Front In Fighting The Banking Crisis

2008-10-13T15:21:00.000+02:00

Well, Europe's leaders have finally bitten the bullet. Faced with what IMF head Dominique Strauss Kahn warned could turn into a global financial meltdown, our leaders have risen to the challenge, at least to a certain extent. The details of what has been agreed continue to remain vague, but obviously I think it is a good FIRST move. More will now almost inevitably follow, but our reluctant leaders have finally got their feet wet, and the bathing costume is on. Now it is only left for them to dive into the ocean which lies in front.

And, of course, the situation was not without its theatricals. Initially billed as a "eurozone only" meet-up, Gordon Brown was ultimately summoned, a move which was not totally essential, but since he was the only one with a real "going plan" on the table, the invitation made sense. Of course Brown himself has been relishing it all, proudly proclaining that Britain will "lead the way" out of the credit crunch, and adding in true Churchilian style that "I've seen in the cities and towns I've visited a calm, determined British spirit; that, while this is a world financial crisis that has started from America, Britain will lead the way in pulling through."

Well, we will see.

While the details at present remain vague the important point would seem to be that Europe's leaders have made a commitment not to allow any systemic bank - in Western Europe (the guarantee does not extent to Hungary which today had to turn to the IMF for support) - to go bust, and it will now be hard for them to go back on this without losing all credibility. The deposit guarantees - which may be useful in terms of reassuring the general public - would now seem to be largely redundant, since if the large banks, and their debts, are to be guaranteed, then logically the deposits themselves are safe. And while Europe itself will underwrite the systemic banks, the national governments will be able to handle the smaller ones (Spain's regional cajas etc) at local level.

So government finances will guarantee the banks, but who will guarantee the government finances? This, at this stage may seem to be an idle question, since none are under direct threat, but I think we need to be clear here, the money which will now need to be spent - and it is way too early to start trying to put precise numbers - will have to come from somewhere, and by and large this will mean the national governments issuing debt, but if we come to individual national governments like Greece or Italy - where debt to GDP ratios are already over 100% - it is not clear how much paper they can actually issue without seeing what is know as the "spread" on their bonds increasing significantly. So while it is certainly time to breath a sigh of relief, we we far from being able to whistle the all clear. And of course the real economy consequences of what has just happened are pretty serious, and the funds which will be spent propping up the banks will not be available for fiscal stimulas packages, so the bottom line is that we, in the OECD world, may well be in for one of the longest and deepest recessions since WWII.

The Package Itself

Now, as I say, the details we have to date of what has been agreed are far from clear. What is clear is that the EU collectively has agreed to guarantee new bank debt in the eurozone (and possibly elsewhere, but this point still awaits clarification, since as I say the guarantee evidently doesn't apply to Hungary, and that should give us some sort of idea about just how strained everything is at the moment). They are also committed to the use of taxpayers money to keep any systemic banks which get into distress afloat, and by implication they are prepared to pool resources to do this (maybe by injecting funds into the ECB as the UK has pledged to do for the Bank of England). This is also a very important precedent: since the European institutional structure is something of a patchwork quilt at this point, it is clearly make, mend and improvise time.

Wolfgang Munchau clearly seems to catch the spirit of the times in a long and thoughtful article in the Financial Times this morning:

"I had a better feeling about Sunday’s eurozone summit. It produced a detailed and co-ordinated national response to recapitalise the banking system, and to provide insurance to revive the inter-banking market. But as far as I could ascertain, this was still agreement on ground rules for national plans, and it is not clear how well this agreement would cover the numerous cross-border issues that have arisen. There is no doubt that, in the eurozone at least, we have come a long way since Friday. It is an okay policy response, but I wonder whether this is going far enough at a time when global investors are pondering whether to pull the big plug."

Well look Wolfgang, my favourite phrase these days is "sufficient unto the day", we have come as far as we are able to come in one weekend. There will still be next weekend, and the one after. Clearly we have not come far enough yet, but as Paul Newman discovered in a once famous film, there are only so many hard boiled eggs you can eat in one sitting.

The key measures announced at the weekend were: a pledge to guarantee until the end of 2009 bank debt issues with maturities up to five years; permission for governments to buy bank stakes; and a commitment to recapitalize what the statement called `"systemically'' critical banks in distress. The statement gave no indication of how much governments were willing to spend or the size of bank assets deemed to be at risk, and European officials refused to estimate the price tag of the measures. Some indication of the numbers involved will start to emerge today, when France, Germany, Italy and others begin to announce their national measures.

"What has been done over the last three days should provide elements of reassurance,'' Dominique Strauss-Kahn, chief of the International Monetary Fund said on French radio Europe 1 today. The worst of the financial crisis ``may be behind us.''

Often criticized for its preoccupation with inflation, the European Central Bank abruptly reversed course last week, cutting interest rates for the first time since 2003 in a move coordinated with the U.S. Federal Reserve and four other central banks. The ECB doesn't have the legal power at the moment to follow the Federal Reserve and buy commercial paper to unblock a financing tool that drives everyday commerce for many businesses, according President Jean-Claude Trichet, who also participated in yesterday's Paris meeting.

``We are looking at our entire system of guarantees and we can imagine new measures to enlarge access to our system of guarantees,'' Trichet said.

As Wolfgang Munchau points out, there is now an almost unanimous consensus among economists about the need for a recapitalisation of the banking system, and for the provision of some form of public-sector insurance for the money markets, even if there is no consensus about how exactly to do this. We should not forget, of course, that it was precisely the practice of offering guarantees - via instruments like credit default swaps - for what appeared at the outset to be investment grade lending but which later turned out to be extremely risky that has produced the current "near meltdown", and we therefore need to be extremely careful about the kind of guarantees we are offering, since what we do not want to happen is to see public finances meltdown in the future in just the way bank finances have.

What Wolfgang doesn't draw too much attention to - perhaps he is too modest - is how few of us there actually are who have been who have been arguing systematically and repeatedly for just this kind of package of measures since the very start. Wolfgang is one of a very select company here, and I, if I may be so presumptious, am another. Back on July the 18th - in a post for RGE Europe EconMonitor - I said the following (the numbers were pretty rule of thumb, but in the light of what is now coming out they don't look that far off):

So what does all this add up to? Well, to do some simple rule of thumb arithmetic, just to soak up the builders debts and handle the cedulas mess, we are talking of quantities in the region of 500 to 600 billion euros, or more than half of one years Spanish GDP. Of course, not every builder is going to go bust, and not every cedula cannot be refinanced, but the weight of all this on the Spanish banking system is going to be enormous...............So it is either inject a lot of money now - more than Spain itslelf can afford alone - or have several percentage points of GDP contraction over several years and very large price deflation - ie a rather big slump - in my very humble opinion. And it is just at this point that we hit a major structural, and hitherto I think, unforeseen problem in the eurosystem (although Marty Feldstein was scratching around in the right area from the start). The question really we need an answer to is this one: if there is to be a massive cash injection into Spain's economy, who is going to do the injecting? Spain alone will surely simply crumble under the weight, and it is evident that the problem has arisen not as the result of bad decisions on the part of the Spanish government, but as a result of institutional policies administered in Brussels and monetary policy formulated over at the ECB. And yet, the Commission and the ECB are not the United States Treasury and the Federal Reserve, no amount of talk about European countries being similar to Florida and Nebraska is going to get us out of this one: and it is going to be step up to the plate and put your money where your mouth is time soon enough.

Well, getting through to the put your money where your mouth is stage didn't take that long, now did it? Twelve weeks and two days to be exact.

My central point at this stage would be that all of this is going to have, among other things, important implications for the real economy, since it is the degree of all that leveraging which we have been busy doing which is now going to have to be reduced, and while we are all busy "deleveraging", our real economies will notice a significant drop in demand. I wouldn't like to dwell too much on the point at this stage, but this was, of course, precisely what happened in the 1930s.

Basically, one economy after another in the developed world is now going to become export dependent. If I take Spain as an example, perhaps things will be clearer. Spanish households are now in debt to the tune of around 90% of GDP. Spanish companies owe something like 120% of GDP, and the government, which is just about to start accumulating more debt, owes about 50% of GDP. Adding that up, Spain incorporated owes about 260% of GDP at the present time. But the situation is worse than that, since debts continue to mount.

Back in the good old days of Q2 2007, when Spain's economy was busy growing at a rate of about 4% per annum, corporate and household debts were increasing at a rate of about 20% per annum. 4% growth for a 20% rise in indebtedness (or an increase of about 30% in debts to GDP) doesn't seem like that good value for money when you come to think about it - and in the meantime Spain Incorporated's indebtedness to the rest of the world (via the current account deficit) was growing at a rate of 10% per annum. Fast forward to Q2 2008, and household and corporate debts were rising at a mere 10% per annum (and government debt had also started to rise, at this point at a rate of around 2% of GDP per annum, or 4% of accumulated debt), but Spain's economy had reached a virtual standstill (true it was still growing at 1% rate year on year, but quarter on quarter it was virtually stationary). So not only is this a horrible "bang for the buck" ratio, it is also totally unsustainable. Indebtedness has to be reduced, not increased, and this can be done in one of two ways, either by ramping up GDP growth (which in the present environment is out of the question in the short term) or by burning down the debt by paying (or writing) it off.

This harsh but unavoidable reality has two important implications. The first of these is that Spain is going to need external help, and the second is that while the level of indebtedness is being reduced, Spain will not get GDP growth from internal demand, and any headline GDP growth there is will need to come from exports.

And of course Spain is just one (extreme) case. There will be a whole company of others who need to make this transition (the UK, Greece, Denmark, Ireland at least, and probably virtually all of Eastern Europe - now what was that football song I used to sing back then in the old days, over there on the Spion Kop... "when you walk through a storm...").

So the question is, while a host of new countries are suddenly struggling to export, who is going to do all the importing? No mean topic this one. The only person who seems to have even the inkling of a proposal here is World Bank head Robert Zoellick, who came right out with it on Sunday: we need a new multilateral structure. The global financial crisis underscores the need for a coordinated action to build a better system, he said on Sunday. "We need to modernize multilateralism for a new global economy....We need concerted action now to ... build a better system for the future." Never better said, and never was the fact that we live in an interconnected world placed under such a stern spotlight.

And just what will this system look like? Well, the details will all need working out, but in broad brushstroke terms, my strong feeling is that we need to bring-in the large developing economies like India, Brazil, Egypt, the Philippines etc en-bloc, and create a Marshall-Plan-type structure were all those newly created developed world savings can be put to good (and safe) use in facilitating the emergence of those long suffering emerging and frontier markets, and in so doing these countries will play their part by helping provide the customers which our own "export dependent" economies will all now so badly need. But, as I say above, sufficient unto the day......

French Industry Contracted In August

2008-10-10T13:58:00.000+02:00

French industrial production declined in August, further evidence that the second-largest economy of the 15 countries sharing the euro probably slipped into recession last quarter. Output at French factories and utilities fell 0.4 percent from a revised 1.4 percent increase in July, the Paris-based statistics office said today.

The decline in production is clear from the anove chart and looks set to worsen as demand and confidence fall on the prospect that the global credit crisis may cause a worldwide recession.

Just one indication of where we are headed may be found in the fact that 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.

The national statistics institute Insee has said that France likely slipped into recession in the third quarter after the economy contracted in the three months through June. Insee reported on Oct. 3 that gross domestic product probably shrank 0.1 percent in the third quarter after a contraction of 0.3 percent in the three months through June. The economy will also 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 said.

The Deflation Threat Looms As Consumer and Investment Demand Falls While Oil Turns Year on Year Negative

2008-10-10T12:30:00.000+02:00

Oil prices plunged below $85 a barrel on Thursday, the lowest level in a year, as Opec, the oil exporting countries’ cartel, called an emergency meeting to discuss reducing its crude production to halt the collapse in prices.

This morning it is more of the same, and prices plummeted to a one-year low below $83a barrel in Asia as investor fears of a severe global economic downturn sparked a panicked sell-off of equities and crude. Light, sweet crude for November delivery was down $4.00 to $82.59 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore, the lowest since October 2007. The contract overnight fell $1.81 to settle at $86.62.

The US Department of Energy reported this week that the country’s oil demand averaged 18.66m barrels a day last week, down 8.6 per cent against the same period a year ago as the economic downturn takes its toll on oil consumption. High prices during the summer have forced US motorists to cut their mileage, and now the looming recession will mean that they don't simply increase it again as oil prices drop.

Basically this is the point I was raising only one month ago on my personal blog, as to how long we would have to wait for oil prices to turn year on year negative. So now we have the answer, they just did.

Since I am - like everyone else I imagine - basically reeling under the volume of work which all that is happening is generating, I will restrict myself here to reproducing an excellent recent piece from my colleague Claus Vistesen on the issue of global deflation risk.

The Global Economy – Is Deflation the Next Macro Story?

by Claus Vistesen: Lausanne

As the horror story of financial markets continues at full speed it may seem a rather futile endeavor to try to make sense of what is increasingly becoming senseless by the day. Yet, you hardly need to be a financial literate to see that the world of finance and banking has been changed for good. I don’t think this was neither unwarranted nor unexpected. At some point, US authorities had to let someone on the Street fail and it turned out to be Lehman (with Merril Lynch of course coming close in behind as it was snapped up by Bank of America). AIG on the other hand was saved as their role as insurer was deemed too important and systemic to merit a collapse. Then we have Wachovia, the Washington Mutual Trust etc etc …I can understand if many will have a hard time gauging the playbook through which regulatory authorities decide who lives and who dies. As we learned this week that Paulson’s plan was not passed by congress the downside now resembles something of an abyss. It will be interesting to see what happens as the bail-out plan makes its second tour to congress.

Since rumors began of the peril of sub prime mortgages and credit crunch became the new buzz word in the financial vocabulary we have seen some quite eventful weeks not to mention days in which volatility has gone far beyond what any respectable VAR model would be able to foresee. Still the past two weeks must clearly take pole position so far. The numbers flying around and the movement in key market parameters have been extraordinary. That equities were down should not surprise us as we have seen it before this year when Wall Street’s office buildings have been re-shuffled. However, this time it was perhaps a bit different as yield on treasuries fell to almost 0% at one point as investors quit anything with but a faint smell of risky assets. Another specific and most unwelcome side effect of this was the corresponding seizure in credit and liquidity markets which followed. At some point, the cost of borrowing money in the interbank market almost doubled taking the LIBOR rate close to 650 basis points (now running at about 550 bps on the back of the échec of the Paulson plan) as well as the three month spread of LIBOR over the treasury climbed to over 300 basis points. These swings tell an important cautionary tale of the seriousness of this crisis. Especially, the lack of confidence and subsequent seizure of the short term financing market is one of the most tangible and severe effect from this crisis.

Meanwhile and beyond the immediate eye of the storm on Wall Street, Europe is entering its own house of pain as cracks in the banking sector begin to steadily emerge. Add to this that the macro environment is pointing towards a steep Eurozone wide recession and you have the ingredients for a very serious downturn on the European continent. I still hold that the lack of real response on the rate front will not only hurt the ECB’s credibility, but also worsen the inevitable slump.

In emerging market land, things are not looking brighter with the anticipated safe haven flows drastically eroding valuations of asset markets in these economies. Russia seems to be suffering more than most from the recent retrenchment of risk aversion. Now, before people let their thoughts wander back to 1998 and LCTM’s spectacular collapse betting on the wrong side of the Russian debt binge I don’t think that Russia stands before an imminent default. Around $700 billion worth of reserves in the form of foreign exchange and national investment vehicles will keep Russia from any kind of immediate default. However, with trading in the USD denominated RTS index halted twice during the last two weeks due the continuation of outflows from foreign investors, it is difficult to ask the subtle question of whether this time, it might not be a little bit more serious than mere tremors [1] .

On the back of yesterday’s news that congress rejected the bailout plan knitted together by Paulson and Bernanke, the MSCI World Index of 23 developed markets dived 6.8 percent, which was the sharpest decline in the measure's 38-year history according to Bloomberg. In Brazil trading was suspended after the Bovespa fell more than 10% and in India and aforementioned Russia equities were equally pummeled. Stephen Jen and his colleagues from Morgan Stanley (who itself is fighting for survival) have some interesting points on capital flows to emerging markets in the latest edition of the GEF.

What happens next is of course anybody’s guess, but below I would like to point to one plausible and tangible outcome of the wheels that were set in motion back in august 2007 when BNP Paribas announced subprime related losses and thus took the credit crisis to global levels.

Deflation as the Next Macro Story?

The macro themes which have characterized the past year’s eventful period have been fickle. As the Fed decided to let interest rates fall in the end of 2007 decoupling was the name of the game as gold and crude oil reached new highs at one and the same time as the USD was pummeled. However, as it became clear that the US was merely the proverbial canary in the coal mine for a much wider global slowdown the sentiment changed. One main question in this regard was always whether the obvious bout of stagflation, at some point, would turn into deflation; a question I also mused on a couple of months back. As per usual with these things there are arguments for and against. The strongest impediment to a worldwide deflationary slump is the continuing pressure from growth in emerging economies. To be sure, these economies are also going to be run down a notch, but the underlying momentum and the lack of global supply slack in terms of energy resources seem certain to keep headline inflation high as we move forward. [2] However, the crucial point here is exactly that the double barril of imported cost-push inflation at the same time as the economy is contracting may lead to a negative feedback loop that can provoke deflation. Consequently, when I look at the current deterioration in real economic activity across OECD as well as the ongoing tensions in credit markets I believe that deflation is now a fair and probable call in the context of key regions and countries.

Essentially, it is difficult not to notice that something has changed with the recent stream of incoming macro data for Q2 and Q3. In Europe, the Eurozone and key parts of Eastern Europe are likely to be in a recession and also Japan seems to have hit a brick wall. Meanwhile emerging economies also seem to be slowing sharply although recessions in that part of the economic edifice are very unlikely.

All this almost looks like de-coupling in reverse, but the US is unlikely have to have seen the worst yet. Re-coupling does not only work one way and just as the US has enjoyed a windfall from exports in H01 2008 so will the rapid deterioration of the rest of the world feed into US growth rates. It is important to note here that the US’ capacity for domestically induced growth is next to none with a consumer saddled with debt and a financial system in shambles. The US has not yet posted growth rates akin to a recession [3] but that will most likely happen as we come closer to 2009 (Q4 08 and Q1 09 would be my guess, but do go have a look at MS’s Berner and Weiseman for a one stop look at the US economy). In the briefest of versions this small view across the global economic edifice indicates that activity is coming down sharply across the board. In many ways, the effects on the real economy are only about to emerge as we move forward from here and this will be accelerated by the ongoing tensions in financial markets.

However, a sharp de-accelerations in activity need not lead to deflation and even if it does it may, according to some, be the only meaningful end result as well as means for correction for some countries. This begs the question of why am I invoking the deflation ghost and, more pertinently, what kind of deflation I am talking about?

In many ways, the current decline in real activity makes perfect sense as it comes on the back of an extraordinary run in terms of the economic cycle. Some are even talking about the end of one big mega-cycle with some debate on when this cycle is supposed to have started. I will leave this question neatly aside for now and merely conclude that with the added flavor of credit market turmoil and the velocity of the cycle that was (and is now gone), this present slowdown and crisis seem, in many ways, to be quite different than in previous global downturns.

To state that things are different however is scarcely enough to determine whether some parts of the global economy are headed for a sustained deflationary spiral (save perhaps for Japan, but I will touch on that below). However, I would still submit the claim this is actually a real risk at this point. In the following I will argue why.

Stating the Obvious

One key element in my call is a statement of the blatantly obvious. The credit crunch is consequently not just a figment of imagination but a real phenomenon with subsequent real and measurable effects, and what we really ought to be asking ourselves is what it actually means? An almost endless amount of commentary has been devoted to the answer of this question, but I still think that we should try to have a closer look for the sake of argument.

If we begin from the point of view of asset prices, I believe most people can agree that the world as a whole has now entered a prolonged period of asset deflation in key sectors. If we look at an asset such as real estate and housing it seems clear that a substantial amount of deflation lies ahead for many economies before previous imbalances can be corrected. Given the strong and accentuated wealth effect from real estate appreciation due to the possibility for equity withdrawal this is one of the main ingredients in the current crisis. In fact, if we peer across most economies who are now facing serious corrections real estate bubbles was an integrable part of past exuberance.

As regards financial assets we also seem to be in for a period of deflation even though the volatility of such movements makes this an entirely different beast. However, it is interesting in this respect to observe that whole classes of financial assets that were hitherto used to prop up many a financial institution’s balance sheet have now been completely evaporated. This is true not least for many credit products as well as it seem that many debt products backed by mortgages are heading for oblivion (the fascinating tale of the Spanish Cedulas here is a good place to start). [4] In this way, it is perhaps not so much a question of deflation in financial assets but more so about a process by which the asset base is narrowed. I do think this is a critical point to take aboard. This is not just about wealth destruction because risky assets fall in value; it is also about the destruction of entire asset classes and financial business models. If we add to this the general tightening of credit and liquidity provisions we end up with a massive and abrupt shrinkage of the global credit base.

Many would see this as a good and indeed quite necessary byproduct of the incoming slowdown. The past economic cycle was one of easy money and an unprecedented expansion of the credit and liquidity base through, not only through leverage, but also through simple product innovation in the context of financial products. I agree with this narrative, but there is more to this story than meets the eye.

What Does it Mean in a Macroeconomic Context Then?

Two things are important here I think.

One the one hand, economies that have been living well on foreign credit will now have to revert to a different or less extreme version of their previous growth path. Countries such as Spain, the USA, Australia, New Zealand, and many emerging economies in Eastern Europe are amongst the major candidates here. In general, it is clear that across the entire global economic edifice external deficit economies will need to tighten their belts due to the widespread global slowdown.
On the other hand, we also need to look at the credit side since this is not only a story about excessive exuberance on the part of debtor nations. It is also very much about the creditor economies and how they have been living high on foreign economies’ willingness and capacity to absorb the inflows. Now that the capacity for credit absorption is declining, so will creditor nations loose momentum as they are no longer able to tap foreign debtors to the same degree as before.

It is especially within this context that I see the potential for deflation. In particular, I would cut a lateral line through those creditor and debtor nations with distinct demographic profiles in the form of low fertility rates and subsequent high and rapidly rising median ages.

On the credit side Japan and Germany stand out as obvious candidates [5] . We can already see from the data how, absent support from external demand and asset income, headline GDP figures are tanking. Given the persistently depressed situation with respect to domestic demand and the deteriorating global credit conditions, there is a real chance that whatever endogenously generated trend growth path these economies can muster, the ensuing price trend could very well be one of deflation in core as well as key asset prices.

Turning to the deficit nations many commentators have noted how the US may be entering a Japan type of lost decade. I still think this is very unlikely; the amount of liquidity being pumped into the system as well as the much more stable demographic profile will prevent the US from falling under the yoke Japan did in the 1990s. However, I need to concede that the continuation of negative real interest rates at one at the same time as the public debt is being used to funnel corporate’s and household’s liabilities are not helping the US debt position. Without a shred of doubt, the US economy is hit much harder than was initially anticipated and at this point in time it remains to be seen whether the aggressive regulatory arrangements will have the wanted effect. In a more fundamental light I think it is quite obvious that the role of the US economy will change for good which need not be a bad thing but will take some adjustment of mindsets.
Meanwhile, I do see considerable potential for deflationary corrections in Spain, Italy and key parts of Eastern Europe. My rationale is that these economies perhaps stand before the most severe adjustment of all. In Spain the structural break is obvious. 6 years worth of housing booms, deficit spending and high growth driven by massive immigration and negative real interest rates will now need to be corrected. The rub here is however that membership of the Eurozone and a fixed exchange rate make wage deflation almost a certainty if a correction is to be achieved. Coupled with the unraveling of the housing market the downward momentum is extreme, and it should never escape our attention that before 2000 Spain was set to become to oldest society on earth. If she is not able to keep those immigrants the ensuing negative shock to the labour market will be quite severe.

In principal the same argument can be applied to Eastern Europe where the recent period of violent inflation may very well be the initial stages to a slump where wage deflation is the only possible way to correct in light of fixed exchange rate regimes. The greatest threat is that the slowdown becomes so severe that emigration intensifies further. This would have quite important consequences for these economies’ already distorted demographic profiles. One obvious question is the extent to which a prolonged period of wage and asset price deflation would be politically palatable. I would seriously doubt this and then we are back in the viper’s nest where the potential for an abrupt rupture of the Euro peg as well as a severe funding crisis à la Asia 1997.

As for Italy, it has long been my standing position that Italy, at some point, could tumble into a Japan like deflation trap. Whether it will happen during the turn of the current cycle is debatable, but the severity of the slowdown certainly suggests that the possibility is a real one. In passing, I would like to note that the issue of Spain and Italy (and quite possibly other economies in the Eurozone too) will not make life any easier at the ECB and in Bruxelles. The point here is simply that the ECB would not, under the current regime, be able to administer some local version of the Japan ZIRP in Italy and/or Spain. The consequences of this inability may unfortunately now become clear for everybody.

The main manifestation of the potential deflationary correction will be through wage deflation (especially in real terms) as well as a persistent gap between strong headline inflation and core prices. This is an undercurrent in the data I have been highlighting persistently in my analyses. The key point to latch on to is the inability of some economies to muster domestic demand which in turn will tend to have a deflationary effect; especially in the context of an incoming slowdown as we are seeing now.

Much Ado about Nothing?

If you have made it this far, you might ask with some legitimacy whether in fact I am not making much ado about nothing. After all, the means for correction here are pretty standard econ 1-0-1 type processes and deflation need not be an unwelcome thing as long as there is light at the end of the tunnel.

My main thesis however is that many of the economies which now face potential deflationary corrections do so principally because of their demographic profiles. If past experience is anything to go by this should raise more than a few eyebrows since we know how difficult it is to escape from deflation once you are caught in the web. This is the ultimate lesson to draw from Japan’s so-called lost decade. It was never exclusively about incompetent Japanese policy makers. Rather, the crucial question to ask is why Japan did not manage to muster sufficient domestic demand to recover and why Japan is now completely dependent on foreign demand and asset income to attain respectable [6] growth rates.

I believe that the answer to this question resides within the sphere of demographics and it is in this light I am worried that the global economy will see a number of economies join Japan (Germany already has I would argue) on the back of the current crisis.

If this turns out to be true it also highlights a number of crucial questions. The first is simply that if many hitherto net credit absorbers are now to become to net credit suppliers where is the extra global capacity going to come from? From my chair, it is as if everybody is talking about the need for the US to export its way out of trouble, but who the heck are going to take up the slack? Moreover, if I am right in the sense that many former deficit nations have suffered a structural break the re-shuffling of the global economy will not lead to a more balanced flow of funds, but rather the opposite. This would especially be the case if key emerging economies persist on maintaining an open life support to whatever is left of the Bretton Woods II system.
Another way to narrate this predicament would be to ask who will do the saving and, equally as important, who will provide yield for the accumulated stock of capital?

As for the first part of the question one is tempted to say everybody. External deficit nations will now have to work towards grinding down the debt and external surplus economies cannot, for the most part, do much but to cling on to the increasingly smaller batch of growing markets. I am still skeptical here that the unwinding of the Bretton Woods II à la traditionelle with China and Petroexporter et al. holds much promise to bring rebalancing. As for the part of the world actually able to act as buffers (e.g. India, Brazil, Turkey etc), they are clinging on with their nails, not only to prevent a rout on their capital markets as money pours out, but equally so in the context of actually absorbing the flows once the money start coming in again, because trust me, it will. The key point in terms of global capital flows is that the margins are simply getting smaller in terms of living off of one’s accumulated savings (assuming of course that you do not dissave) and that this will hurt economies in the old end of the demographic spectrum in particular.

In conclusion, one of the main forward looking macro themes I am watching at the moment is the potential for deflation. I would especially ascribe this risk to be high in economies in need of serious competitive and debt reducing corrections as well as in economies unable to muster sufficient domestic demand to stay above water when external demand falters. In my rudimentary analysis I use demographics as a yardstick and as such my claim is quite easily falsifiable. The only thing we need to do then is to watch and see what happens.

[1] My colleague Edward Hugh does just that, and I recommend you to go have a look.
[2] Even if it may turn negative y-o-y in 2008 on the back of the accelerated slowdown.
[3] Although most would agree that the US is now firmly in a recession based on the commotion in financial markets and the deterioration of the job market.
[4] The very aggressive expansion of central banks’ balance sheet and the de-facto ability of financial institutions to offload assets on to ”public” books will be an interesting case to gauge for economic policy makers and historians alike.
[5] Japan has obviously never actually escaped deflation.
[6] Respectable here can mean many things, but one simple derivative is the extent to which Japan need a certain degree of headline growth in order to keep on servicing its liabilities.

The French Economy Glides Elegantly Into Recession

2008-10-05T14:33:00.000+02:00

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.

SUPPLIERS' DELIVERY TIMES

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.

INSEE Signal Recession In The French Economy

2008-10-03T12:40:00.001+02:00

Well, according to the latest estimate from France's national statistics office INSEE, the French economy contracted in Q3 2008, if that is the case 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.

``The French economy continues to be hurt,'' Insee's chief forecaster Eric Dubois said at a briefing in Paris yesterday. The current credit crisis ``is an important risk,'' he said, as well as oil prices, ``which have become more volatile.''

French President Nicolas Sarkozy introduced 8 billion euros ($11 billion) of tax cuts this year but this has evidently not been sufficient to underpin French growth as surging commodities prices have pushed inflation higher at the same time as global demand has cooled. Sarkozy this week took additional steps in an attempt to support the economy by allowing the government to buy more than 30,000 unfinished homes at a discount in order to prop up the slumping real estate market. French housing starts were down year on year by 13 percent to 394,726 in the June-August period and the weaker demand has begun to drive down the price of existing homes. Sarkozy is also introducing measures to boost loans to small and medium-sized companies by 22 billion euros ($30.4 billion) by the end of 2009, in a attempt to offset the impact of the credit crunch.

INSEE suggest consumer spending will stagnate in the second half of the year while unemployment rises - to 7.8 percent by the end of the year, up from 7.6 percent in the second quarter, according to their forecast. Corporate investment fell 0.2 percent in the third quarter and may well drop a further 0.1 percent in the last three months of the year. Exports rose 0.1 percent but may drop back by 0.2 percent in Q4, while imports were probably down 0.1 percent in Q3 (reflecting the weakening internal consumption) but could rebound and increase at an equivalent pace in the fourth quarter.

French Consumer Confidence Improves Slightly In September

2008-09-26T12:43:00.001+02:00

French consumer confidence rose for the first time in more than a year in September as falling fuel prices left people with more to spend on food and clothing. The monthly consumer confidence servey carried out by the national statistics office came in with a reading of minus 44, up from a revised record-low of minus 47 in July, the last month for which the survey was held.

The price of oil has now fallen by around a third from its record in July. Still, crude remains at more than $100 a barrel and is 33 percent higher than a year ago, while the continuing crisis in global financial markets may act as a constraint on consumers' ability and willingness to spend in coming months.

Thus despite the uptick in confidence French consumer spending on manufactured goods actually fell in August. Household spending on manufactured goods, which accounts for about 15 percent of the French economy, fell 0.3 percent from July, when it rose 0.4 percent, according to data from Insee. From a year earlier, spending declined 0.1 percent.

The French economy shrank 0.3 percent in the second quarter, the first contraction in more than five years, according to the detailed figures released by INSEE today. Household spending fell an annual 0.1 percent, while exports declined 1.7 percent, from an increase of 2.6 percent in the first three months.

French Business Confidence Down Again In September

2008-09-24T21:15:00.000+02:00

French business confidence fell to its lowest level in five years in September. An index of sentiment among 4,000 manufacturers fell to 92 from a revised 97 in July, according to the French national statistics office INSEE. That was the lowest reading since August 2003.

The sub-index measuring sentiment on the economic outlook fell to minus 42 from a revised minus 33 in July; the outlook for orders dropped to minus 24 from a revised minus 19; and the foreign orders component slipped to minus 27 from a revised minus 16. The measure of French executives' outlook for their own production fell from a revised minus 1 to minus 10.

Europe's manufacturing and service industries contracted at the fastest pace in almost seven years in September according to the flash reading on the composite purchasing managers index. French manufacturing contracted at the fastest rate in several years, while French services showed a very slight expansion. The French economy contracted for the first time in more than five years in the second quarter, shrinking by 0.3 percent from the first three months. Thus the situation must be touch and go whether we see a technical recession in the third quarter, or whether the French economy just manages to scrape a slight expansion by a hair.

French Consumer Spending Falls In August

2008-09-23T15:19:00.000+02:00

French consumer spending on manufactured goods fell in August after the euro region's second-largest economy shrank and shed jobs. Household spending on manufactured goods, which accounts for about 15 percent of the French economy, fell 0.3 percent from July, when it rose 0.4 percent, according to data from Insee, the national statistics office, earlier today. From a year earlier, spending declined 0.1 percent, the first year-on-year drop since September 1997.

Spending on cars in France slipped 1 percent in August from the previous month, and purchases of clothes and leather goods dropped 1.9 percent, compared with a 0.1 percent decrease in July, Insee said today. Spending on home appliances and furniture rose 0.6 percent.

Eurozone Flash PMI's For Manufacturing And Services Indicate Continuing Contraction

2008-09-23T15:17:00.000+02:00

Europe's manufacturing and service industries contracted in September at the fastest pace in nearly seven years as continuing problems in credit-markets slowed lending and borrowing and companies scaled back production in response to slowing orders. The Royal Bank of Scotland Group composite purchasing managers index dropped to 47 - down from 48.2 in August - and the lowest since November 2001.

While these are only initial flash estimates, and we will need to wait to see the detailed confirmation on October 1st, this extended contraction in both manufacturing and services industries does suggest that it is now touch-and-go whether the eurozone economy will contract for a second consecutive quarter in Q3 2008, making for the first collective recession since the single currency was introduced.

The manufacturing index fell to 45.3 this month, down from 47.6 in August, while the services index fell to 48.2 from 48.5.

French Manufacturing Contracts Drastically, While Services Unexpectedly Expand

The French manufacturing PMI continued to indicate contraction in September, with the reading falling to 43.6, a much sharper rate of decline than the 45.8 registerd in August. This is the fastest pace of decline in manufacturing production since October 2001, with output being dragged down by very weak domestic demand, which prompted a huge decline in new orders, according to the statement by Markit Economics.

The service sector, on the other hand, showed unexpected strength, rising to 50.4 in September from 48.0 in August.

2008-09-04T11:15:00.000+02:00

France's unemployment rate held steady in the second quarter of 2008 following 15 months of continuous declines. The jobless rate stayed at 7.6 percent in the April-June period, according to data from INSEE the French statistics office. Excluding France's overseas territories, the unemployment rate was 7.2 percent, a 25-year low.

Companies are evidently becoming more reluctant to hire as consumer spending wanes, while a 46 percent rise in oil prices in the past year adds to costs. Gross domestic product fell 0.3 percent in the second quarter, and Prime Minister Francois Fillon now sees the economy growing about 1 percent this year, significantly down from a previous forecast of 2 percent.

Company investment, consumer spending and exports all declined in the euro region in the second quarter, pushing the member state economies closer to a recession. The 0.2 percent economic contraction in the three months through June was the first since the introduction of the euro almost a decade ago. Companies are also facing tighter credit conditions as the European Central Bank keeps interest rates at a seven-year high and banks remain reluctant to lend in the wake of the U.S. subprime mortgage market collapse.

In fact the French economy lost jobs for the first time in more than four years in the second quarter. The deterioration in the labor market comes at a time when inflation is accelerating at the fastest pace in 12 years, weakening consumer spending and aggravating the slowdown.

Insee also revised up the unemployment rate for the first quarter to 7.6 percent from the 7.5 percent initially reported.

French Manufacturing Contracts Again In August

2008-09-01T22:33:00.000+02:00

Manufacturing activity in the euro zone contracted for the third straight month in August, as German firms reported shrinking output for the first time in three years. The PMI for the euro zone's factory sector rebounded slightly and rose to 47.6 in August from 47.4 in July, data from research group Markit Economics showed on Monday, beating expectations for a rise to 47.5. But the measure still indicated that output is shrinking (if a little more slowly) since a reading above 50 signals growth, while a level below 50 signals contraction.

The data showed that Germany and Spain recorded very sharp decreases in export orders, while employment in the currency bloc fell for the third straight month. Price pressures eased somewhat, but remained at high levels, underlining the European Central Bank's dilemma as it tries to balance high inflation levels and slowing growth across the region. Germany's PMI was revised down to 49.7 in August after 50.9 in July - marking the first contraction since the third quarter of 2005.

The French PMI fell to 45.8 in August from 47.1 a month earlier, beating expectations for a drop to 45.1.

Italy's PMI rose to 47.1 compared with 45.3 a month earlier. Spain's manufacturing PMI hit 42.4 in August compared with 39.2 in July. Manufacturing activity edged up in Spain and Ireland but remained at very low levels, with Spain's reading the third lowest in the survey's 10-year history. The euro-zone manufacturing PMI is based on data from Germany, France, Italy, Spain, Ireland, Austria, Greece and the Netherlands, which account for about 92% of the bloc's manufacturing activity

Eurozone Recession On the Horizon?

2008-08-21T13:50:00.001+02:00

Is the first zone wide recession in the short history of the eurozone about to be registered? Certainly the flash PMI estimates for August give the impression that it might. The Royal Bank of Scotland Group Plc's composite index came in at 48 after 47.8 reading in July. Any result under 50 indicates contraction. Unfortunately we only get flash estimate breakdowns for France and Germany, but it isn't that difficult to deduce from the composite number that Spain and Italy continue to contract - although given that the composite rebounded slightly, while both services and manufacturing slowed in Germany, and in France manufacturing contracted more sharply in July while the contraction eased a bit in services, then it may be that Spain and Italy weren't contracting quite so strongly in August as they were in July.

Germany

The German manufacturing index fell to 49.9 in August, its lowest level in three years, after slipping back index to 50.9 in July.

Helping to push down the manufacturing indicator was the export component, which fell to its lowest level since June 2003, according to the report from Markit Economics.

The services PMI reading was not much better, falling to 50.6 in August from 52.1 in June. As things stand German services are riding just shy of contraction if the flash reading is borne out in the final result.

In its report, Markit Economics noted that the business expectations sub-index for Germany had slipped to the lowest level since November 2002.

France

Activity in France's manufacturing sector contracted at the sharpest rate in over six years in August, with a contraction of 45.1 being registered, down on July's 47.1 and the lowest level since December 2001.

The service index came in at 48.5, above July's 47.5 but still only its second time in negative territory since mid-2003. New business logged by service firms shrank at its fastest pace since the data was first collected in May 1998.

"If you extrapolate these figures through to the third quarter you're probably looking at stagnation of GDP (gross domestic product)... This is not a harbinger of imminent upturn," said Chris Williamson at data compiler Markit Economics. "Nothing points to a fundamental turnaround... I think there's been a spillover effect from Italy, Spain and now Germany, and France has followed suit."

So Is It Recession, and Will We See Rate Cuts From the ECB

Gross domestic product fell 0.2 percent in the second quarter from the first, when it grew 0.7 percent, according to the data released ny Eurostat (the European Union's statistics offic) last week, and it now seems clear that this contraction may well pass over into the third quarter. In fact Germany's Economy Ministry said only yesterday that the economic outlook in Germany has worsened even beyond the second quarter, when gross domestic product shrank for the first time in four years.

European consumers are not getting much relief from falling oil prices either, since while oil prices have fallen 20 percent from a record $147.27 a barrel on July 11 the euro has dropped 7 percent ($1.4780 today) from its peak of $1.6038 hit on July 15, taking a lot of the edge off the drop. The fall in the euro will however make exporting outside the zone easier, the difficulty is that the demand for exports is slowing generally as the global economy slows.

The European Central Bank, which raised its benchmark rate by a quarter point to 4.25 percent in July, currently predicts growth will slow to about 1.8 percent this year from 2.7 percent in 2007, but today's PMI data would seem to confirm that the ECB's growth projections are no longer realistic and that the time to move over into rate cuts mode is fast approaching.

French GDP Contracts in Q2 2008

2008-08-14T21:11:00.000+02:00

The French economy contracted for the first time in more than five years in the second quarter as exports declined and companies cut spending. Gross domestic product in what is the euro-region's second-largest economy fell 0.3 percent from the first quarter, when it rose 0.4 percent, according to the latest data from the French national statistics office Insee. That's the first drop since the fourth quarter of 2002.

The French economy contracted for the first time in more than five years in the second quarter as exports declined and companies cut spending. Adding to signs of slowdown, industrial production, which accounts for 15 percent of the French economy, fell for a second month in June. French business confidence declined to the lowest in more than three years in July and manufacturing shrank.

European companies are being hurt by the euro's 10 percent ascent against the dollar over the past year, which is making exports less competitive abroad. Over the same period, crude oil prices have increased 62 percent, sapping the spending power of both companies and consumers. Growth in the first quarter was revised down from a previously reported 0.5 percent.

Adding to signs of slowdown, industrial production, which accounts for 15 percent of the French economy, fell for a second month in June. French business confidence declined to the lowest in more than three years in July and manufacturing shrank.

Exports declined 2 percent from the previous three months, when they rose 2.4 percent, today's report showed. Consumer spending rose 0.1 percent in the three months through June after falling 0.1 percent in the first quarter. Corporate investments declined 1 percent in the second quarter after rising 1.2 percent in the January March period.

So this seems to be largely about reduced exports, increased imports and declining investment. External trade contributed a negative 0.5% to growth in the quarter.

France Clocks Up Another Large Trade Deficit In June

2008-08-07T13:28:00.000+02:00

France’s trade deficit widened sharply in June - reaching a record €5.64bn, exacerbated by the higher cost of oil and energy imports and weaker car exports. The trade gap - up from a revised €4.7bn in May - was significantly higher than many economists had forecast and will weigh heavily on an already sharply slowing French economy.

French exports increased 0.6 percent to 34.9 billion euros in June, with shipments to the U.S. and the Middle East declining. French business confidence fell to the lowest in more than three years last month as surging inflation and the stronger euro further dimmed the economic-growth outlook.

Growth in the second quarter is likely to be weak at best, with private sector analysts predicting expansion of between 0 and 0.2 per cent.

The trade deficit for the first half of 2008 widened to €24.4bn, up from €15.8bn in the same period last year. Anne-Marie Idrac, French trade minister, said that stripping out energy the trade deficit for the first half of 2008 had in fact narrowed by €3bn, helped by higher agricultural exports and a jump in Airbus sales.

For the last five years, the French economy has instead been dependent on domestic demand and construction. In this sense the French economy is the mirror image of the German economy, since in Germany the strong export performance until recently has driven GDP growth while domestic demand has remained weak. At the end of the day this self-dependence could turn out to be a boon. since the lesser dependence of the French economy on exports means it might be less affected by a global slowdown especially if oil prices and hence inflation ease back and the ECB starts to loosen monetary policy.

French Services PMI Shows Stronger Contraction In July

2008-08-05T15:42:00.000+02:00

The euro zone's services sector slid further into contraction in July, hitting a five-year low, while inflationary price pressures remained near record levels. Final data in the monthly PMI survey of private sector companies showed that of the big four economies in the euro zone, only in Germany did services activity expand, and in this case slightly more quickly than in June. The RBS/Markit Eurozone Purchasing Managers Index for services companies, which range from banks to cafes, fell to 48.3 in July from 49.1, unrevised from the flash estimate and well below the 50.0 mark that separates growth from contraction.

The French services PMI plummeted to 47.5, its lowest since the survey began in 1998, while Italy slipped into further contraction to a survey low of 45.6.

French Manufacturing PMI Contracts In July

2008-08-01T13:28:00.000+02:00

The seasonally adjusted RBS/Markit Eurozone Manufacturing PMI (Purchasing Managers' Index) registered 47.4 in July, down from 49.2 in June and slightly below the flash estimate for July of 47.5. The final reading signalled the second consecutive monthly deterioration in manufacturing sector business conditions and the steepest rate of decline since June 2003.

Output meanwhile fell at the fastest rate since December 2001 in France. The French manufacturing PMI slipped to 47.1 in July, down from the previous month's 49.2 reading.

French Retail PMI Up Slightly In July 2008

2008-07-30T13:45:00.000+02:00

The latest Bloomberg Eurozone Retail Purchasing Managers' Index, based on a mid-month survey of economic conditions in the euro area retail sector, rose from 44.0 in June to 46.0 in July. By remaining below the 50.0 level, the index pointed to a further fall in sales during the month despite an easing in the rate of decline from the steep pace seen in June.

In contrast to Italy and Germany (where sales contracted) sales rose modestly in France, offsetting the fall seen in June. However, the rate of increase remained well down on the buoyant pace seen earlier in the year. The month-on-month sales index recovered from 48.7 to 51.3.

Of the five product categories covered by the survey, food & drink retailers reported a year-on-year increase in sales revenues in July. However, gains in annual sales in part reflected higher prices rather than improvements in volumes. For the third successive month, the steepest decline was reported for autos & fuel, as deteriorating consumer confidence hit car sales. Annual sales of pharmaceuticals were marginally lower following two months of growth. The rate of increase in prices paid for goods by retailers remained elevated in July, picking up on June to register the fourth-highest pace yet recorded by the survey. The prices index edged up to 67.3, from 67.1. Purchase price inflation hit record highs in both Germany and Italy, but eased to a ten-month low in France.

Retail sector employment fell for the fourth month running in July, with the rate of job losses unchanged on June's twenty-eight month record. The employment index held steady at 48.6. All three countries registered shrinking retail workforces, with French retailers reporting the steepest rate of decline (and posting the largest monthly fall since January 2006). In Italy, headcounts at retailers fell for the seventh consecutive month. Retail staffing levels were also trimmed in Germany, but very slightly.

French Consumer Confidence Drops To A Record Low In July

2008-07-29T13:41:00.000+02:00

Consumer confidence in France fell to a record low in July as inflation accelerated to the fastest pace in 12 years, eroding households' purchasing power. The measure of consumer sentiment dropped to minus 48, the lowest since the index was introduced in 1987, from minus 46 in June, the Paris-based national statistics office, Insee, said in a statement today.

French Business Confidence Falls In July

2008-07-24T21:52:00.000+02:00

French business confidence fell to the lowest in more than three years in July as record oil prices and a stronger euro dimmed the outlook for economic growth. An index of sentiment among 4,000 manufacturers dropped to 98 from 101 in June, according to Insee, the Paris-based national statistics office. That was the weakest since May 2005.

Insee's sub-index of how executives see the outlook fell to minus 34 from minus 15; a gauge of orders dropped to minus 18 from minus 13; and a measure of foreign orders slipped to minus 14 from minus 7.

Adding to signs of a slowdown, France's manufacturing and services industries shrank in July according to the latest flash reading on the Royal Bank of Scotland composite PMI for France dropped to 47, its lowest level in over 6 years. The flash estimate for France's service sector fell to 47.0 in July from 50.1 in June, according to data prepared for the RBS and released Thursday by Markit Economics.

That's the lowest reading on record and significantly below the consensus expectations of economists who had forecast a reading of 49.6. The PMI reading for the manufacturing sector was also lower than expected, falling to 47.3 in July from 49.2 in June. That's the lowest reading for five years

Europe's largest economies have been showing signs of slowing since the end of the first quarter. Business confidence fell to the lowest level in almost three years in Germany, according to the Munich-based Ifo Institute today. In Italy, business confidence slipped to its weakest since October 2001, according to the Isae Institute index.

The eurozone PMI index for the manufacturing sector fell from 49.2 points in June to 47.5 in July while its services counterpart dropped from 49.1 to 48.3. With both indicators well below the 50-mark which separates expansion from contraction, what we may have here is an unequivocal recession warning.

French Consumer Spending Falls In June

2008-07-23T10:10:00.000+02:00

French consumer spending on manufactured goods fell in June. Household spending, which accounts for about 15 percent of the economy, fell 0.4 percent from May, when it rose a revised 1.7 percent, Insee, the national statistics office in Paris, said today.

Spending on French manufactured goods stagnated in the second quarter after expanding 0.1 percent in the first three months. Year on year, consumer spending growth slowed to 1 percent in June from a revised 2.8 percent in May. The May consumer-spending figure was revised down from a previously reported increase of 2 percent.

Spending on cars in France fell 3.8 percent in June from the previous month, and purchases of clothes and leather goods rose 0.6 percent, compared with a 4.4 percent increase in May. Spending on home appliances and furniture increased 0.8 percent.

French Industrial Output Drops In May 2008

2008-07-10T13:07:00.000+02:00

French industrial production dropped sharply in May - by the most in almost three years, adding to the accumulating evidence of a slowdwon in the eurozone economy. The output of French factories and utilities fell 2.6 percent from April, the biggest decline October 2005, according to the nation statistics office this morning. Output, rose a revised 1.5 percent in April over March and was up 0.7% year on year.

This heavy fall in French industrial output, coming on the back of the widening trade deficit, has reinforced the impression of a fairly sharp slowdown in GDP growth in the second quarter. Manufacturing output, which excludes food and energy, was down 2.5 percent in May over April.

The French customs office reported on Wednesday a widening of the country's trade deficit to 4.738 billion euros in May, well ahead of the consensus of 4.0 billion euros, as exports fell to 34.719 billion euros from 35.313 billion the month before.

Excluding the more volatile energy and automobile components, all other components fell in in May. Consumer and intermediate goods also showed a decline if you average the data for both April and May. The car sector output, which was down 8.0 percent in May, is one of the most volatile segments, but the very sharp decline is consistent with the idea of a strong slowdown in the sector.

If we add the industrial output reading to weakening consumer spending and the poor trade balance, it seems to be consistent with a picture of stagnating GDP growth in the second quarter,and even negative GDP growth quarter on quater cannot be entirely ruled out.

French Exports Drop in May 2008

2008-07-09T19:19:00.000+02:00

France's trade deficit widened in May to a record as the stronger euro and slowing economic growth led to a decline in exports. The deficit rose to 4.74 billion euros ($7.45 billion) from a revised 3.74 billion euros in April, the Trade Ministry in Paris said today. Exports in May fell to 34.7 billion euros from a revised 35.3 billion euros in April, with exports to the U.S. leading the decline. Imports rose to 39.5 billion euros from a revised 39.1 billion euros in April.

Europe's third-biggest economy will probably grow by 0.2 percent in the second quarter of 2008, the least in almost two years and a third of the pace in the first three months, according to the initial estimate of Paris-based statistics office Insee. The economy will stagnate in the third quarter and grow 0.2 percent in the final three months of 2008, Insee said.

France Consumer Confidence June 2008

2008-06-26T10:59:00.000+02:00

Consumer confidence in France fell to a record low in June as the fastest inflation in 12 years steadily erodes household purchasing power. The consumer sentiment index dropped to minus 46, the lowest since the scale was introduced in 1987, and down from a revised minus 42 in May, according to the Paris-based national statistics office, Insee, earlier today.

The sub index measuring the individuals outlook for their personal financial situation declined to minus 23 from minus 19, while the outlook for the standard of living sub index fell to minus 57 from minus 50.

French consumer prices climbed at an annual 3.7 percent rate in May, exactly matching the rate for the euro region for the month.

France Business Confidence and Housing Starts June 2008

2008-06-24T11:59:00.001+02:00

French manufacturers confidence held at the weakest in more than two years in June and housing starts slumped in May, suggesting that growth in the euro-area's second-largest economy is faltering.

An index of sentiment among 4,000 manufacturers was unchanged at 102, according to Insee, the Paris-based national statistics office. In France, Insee's manufacturing confidence indexes for May and June were the weakest since December 2005.

Housing Sector

Housing starts dropped by 21.6 percent in the three months through May from a year earlier, while sales of new homes fell by nearly 28 percent in the first quarter to 26,700 units. If this pace continues it may well amount to a shock similar to the crisis at the beginning of the 1990s.

The root of the problem seems to be that lending organisations do not have confidence in the European Central Bank’s strategy for refinancing banks. The average fixed interest rate on 20-year loans has recently risen above 5.0 percent for the first time since 2003. As global financial conditions turned down dramatically with the US subprime home-loan crisis from last August it looked as if France would be spared a severe correction, since recent French practice, and the lessons of the property crisis in the 1990s - it was argued - meant that banks had maintained a high level of prudence in lending.

But now property experts are wondering openly, how far and for how long the market will go down, and they also expect to see a sharp fall in the number of estate agencies which mushroomed during the boom.

Signs of a marked cooling have been emerging for months, and on Friday the national statistics office INSEE said bluntly: “France, too, is now experiencing a real-estate market downturn.

Consumer Spending in May

On the other hand French consumer spending on manufactured goods increased more than economists expected in May as shoppers bought more cars and clothes. Such spending, which accounts for around 15 percent of the French economy, rose 2 percent from April, when it fell a revised 0.9 percent, according to data from Insee, the national statistics office. The May increase was the first in three months.

Manufacturing and Services PMIs Flash Estimate June 2008

2008-06-23T16:16:00.000+02:00

The French economy may well be contracting in June. According to Markit Economics who released data on the purchasing managers indexes for manufacturing and services earlier today, both fell into contraction territory in June. According to the flash estimates, the manufacturing PMI fell to 49.2 - its lowest level in more than three years - after rising to 51.5 in May.

"The drop in output reflected a contraction of new orders for the second time in the past three months, with the principal weakness of demand centred on the domestic market as export orders fell only slightly," Markit said in a press release.

The services PMI for France also slipped to 49.2, after falling to 50.5 May. The services PMI is now at its lowest level since November 20

Services have obviously been contracting for several months now, at least according to this indicator.

INSEE Lowers French 2008 Growth Forecast

2008-06-20T11:51:00.000+02:00

The French economy will expand by 1.6 percent this year, the slowest pace in five years, as rising prices damp consumer spending and the housing market slumps, the government statistics office said today. The economy is now expected to grow by 0.2percent in the second quarter, the slowest pace in almost two years and a third of the pace in the first three months, Insee said in its quarterly report. The economy may well stagnate in the third quarter and grow 0.2 percent in the final three months, Insee said.

France Inflation May 2008

2008-06-11T16:10:00.000+02:00

French inflation accelerated to the highest in more than 12 years in May on rising energy and food costs. French Eu harmonised consumer prices rose by an annual 3.7 percent, as compared with a rate of 3.4 percent in April, according to data from Insee, the national statistics bureau, today in Paris. The inflation rate in May was the highest since 1996, when Insee began reporting the data. Prices rose 0.6 percent from April.

French household spending on manufactured goods fell 0.8 percent in April from March, the third decline in four months, and consumer confidence dropped to a record low last month, suggesting that economic growth is slowing this quarter.

France Industrial Output April 2008

2008-06-10T14:21:00.001+02:00

French industrial production rebounded in April following a drop in March, led by output of cars, electrical equipment and chemicals. Production at factories and utilities, which accounts for around 15 percent of the French economy, was up 1.4 percent month on month from March, when it fell 1 percent, the national statistics bureau, Insee, said today in Paris.

French manufacturing, which excludes energy and food output, increased 1.7 percent on the month, Insee said today. From March 2007 earlier, industrial output rose 3.2 percent and manufacturing increased 2.8 percent.

France External Trade April 2008

2008-06-06T10:42:00.000+02:00

France's trade deficit fell back again in April as exports rebounded from a three-month low and imports fell for a third consecutive month, signaling domestic growth may be slowing. The gap shrank to 3.72 billion euros from 4.27 billion euros in March, which was revised from a shortfall of 4.7 billion euros, according to the Trade Ministry in Paris on Friday.

French consumers and manufacturers are facing rising production costs from the near-doubling in crude oil prices in the past year.

Imports fell to 38.68 billion euros from 38.75 billion euros and exports rose to 34.97 billion euros, from 34.48 billion euros in March. Airbus delivered 22 planes for 1.1 billion euros in April, after supplying 28 aircraft worth 1.5 billion euros in March.

French Unemployment Q1 2008

2008-06-05T14:00:00.000+02:00

France's unemployment rate dropped to 7.5 percent in the first quarter as the euro region's second-biggest economy expanded at double the pace of the previous three months. The jobless rate fell from 7.8 percent in the fourth quarter, according to Insee, the France's economic statistics office. Not including France's overseas territories, the unemployment rate was 7.2 percent, the lowest in 25 years.

France's economic growth accelerated more than economists forecast in the first quarter as stronger exports offset weaker household spending. Still, inflation near the fastest in 12 years is eroding consumer sentiment, signaling expansion may be set to slow this quarter.

Gross domestic product expanded 0.6 percent in the first quarter from the previous three months, when it grew 0.3 percent, Insee reported May 15. French Minister Christine Lagarde expects the economy to grow between 1.7 percent and 2 percent this year, down from 2.2 percent in 2007.

There are signs growth is slowing. Manufacturing and service industries barely expanded in May according to the purchasing managers indexes and retail sales suffered the biggest annual decline in April since records began in 1995.

Christine Lagarde said in an interview with France Info radio today that the percentage of the working-age population in jobs rose in the first quarter to 65.1 percent from 64.7 percent.

France Services PMI May 2008

2008-06-05T13:56:00.000+02:00

Euro zone services activity slipped close to contraction in May, in line with expectations, as growth took a sharp hit in France, while inflationary pressures mounted, a key survey showed on Wednesday. The RBS/NTC Eurozone Services Purchasing Managers index fell to 50.6 in May, the same level as the flash estimate and as forecast by economists, from 52.0 in April.

The rate of expansion in the French services sector was down again in May according to the NTC purchasing managers' index. The index was revised down to 50.5 from a provisional figure of 50.7, compared with a reading of 52.8 in April, and is now only just above the 50 dividing line which separates expansion from contraction.

France Manufacturing PMI May 2008

2008-06-02T13:51:00.000+02:00

NTC Economics reported on Monday that the French manufacturing purchasing managers' index came in at 51.5 in May, up from both the expected 51.3 reading and the previous month's 51.1 level.

However, new orders, suppliers' delivery times, stock of purchases and quantity of purchases were the only categories which saw improvements in May, rising to 51.2, 45.7, 49.2 and 51.3 from 48.6, 43.9, 47.5 and 50.4 respectively.

"Although there were signs of firmer domestic demand, with new orders rebounding modestly following April's decline, exports remained a drag on order books as the strong euro and soft demand in the US and elsewhere continued to weigh on foreign sales," economist Jack Kennedy at NTC Economics said in a press release.

Kennedy concluded that the manufacturing sector would not contribute significantly to French economic growth in the second quarter of 2008 and that the jump seen in Q1 will not be seen in the following quarter.

France Consumer Confidence May 2008

2008-05-28T15:29:00.001+02:00

Consumer confidence in France dropped to a record low in May after fuel, gasoline and food costs soared. The French consumer sentiment index fell to minus 41, the lowest level since the index was introduced in 1987, from a revised minus 38 in April, Insee, the Paris-based national statistics office, said today.

France's inflation rate fell to 3.4 percent in April after reaching 3.5 percent in March, the highest in at least 12 years. As a result, consumer spending on manufactured goods fell 0.8 percent in April from March, the third drop in four months, Insee reported last week.

France Business Confidence May 2008

2008-05-27T15:03:00.001+02:00

French business confidence declined to the weakest in more than two years in May as rising energy prices and strong euro hurt the outlook for corporate sales and profits. An index of sentiment among 4,000 manufacturers slid to 102 from 106 in April, according to Insee, the Paris-based national statistics office. That was the lowest since December 2005.

Growth in the euro area's second-largest economy has been slowing recently as inflation hurts consumer spending at the same time as exporters feel the pinch of slowing orders from the U.S., a euro worth around $1.55 and record oil prices.

A sub-index of how executives see the economic outlook fell to minus 15 from minus 9, while a gauge of orders dropped to minus 11 from minus 4 and a measure of foreign orders declined to minus 7 from 3.

The 18 percent gain in the euro against the dollar over the past year will continue to put pressure on exports as rising inflation weighs on consumer demand in local markets. Consumer prices rose 3.4 percent in France this month from a year ago. Higher energy costs are pushing up inflation, with the price of oil reaching a record $135.09 a barrel on May 22.

The French government expects growth of between 1.7 percent and 2 percent this year, compared with 1.9 percent last year.

French Consumer Spending April 2008

2008-05-23T15:02:00.001+02:00

French consumer spending on manufactured goods unexpectedly fell for a second month in April as shoppers scaled back purchases of cars and clothes.

Such spending, which accounts for about 15 percent of the economy, dropped 0.8 percent, after a revised decline of 1 percent in March, Insee, the Paris-based national statistics office, said today. Economists expected a 0.5 percent increase, the median of 22 estimates in a Bloomberg survey showed. Spending rose 0.4 percent from a year earlier. Inflation near the fastest in 12 years has pushed consumers' confidence to a record low, slowed spending growth, and hurt President Nicolas Sarkozy's popularity. Households' purchasing power may decrease further in coming months as economic expansion loses momentum.

France GDP Q1 2008

2008-05-15T17:43:00.000+02:00

France's economic growth accelerated more than economists forecast in the first quarter as stronger exports more than offset weaker consumer spending. Gross domestic product in the euro region's second-largest economy expanded 0.6 percent from the previous quarter, when it grew 0.3 percent, national statistics office Insee said today in Paris. On a year on year basis the economy grew by 2.2% when compared with the first quarter of 2007.

In the quarter, exports rose 3.1 percent, after slipping 0.2 percent in the last three months of 2007. Imports climbed 1.9 percent, meaning that net trade added 0.3 percentage point to GDP growth in the period, Insee said.

Consumer spending growth slowed to 0.1 percent from 0.6 percent in the fourth quarter. Stocks were unchanged after a drop the preceding quarter. Corporate investment climbed 1.8 percent, after 1.2 percent in the last quarter.

Fourth-quarter growth was revised lower from the previous estimate of 0.4 percent. From a year earlier, the economy expanded by 2.2 percent in the first quarter, Insee said.

Separately, the institute said the economy grew 2.2 percent in 2007, the same pace as 2006, as corporate investment rose and households gained purchasing power and increased their savings. Adjusted for working days, GDP expanded 2.1 percent in 2007, down from 2.4 percent in 2006.

Hurt by deteriorating finances of local governments, the country's total public deficit increased by 7.7 billion euros to 50.3 billion euros, representing 2.7 percent of GDP in 2007 from 2.4 percent in 2006. Public debt amounted to 1.21 trillion euros at the end of last year, amounting to 63.9 percent of GDP, up from 63.6 percent at the end of 2006.

Public spending amounted to 52.4 percent of GDP in 2007, down from 52.7 percent the previous year. The tax burden fell to 43.3 percent of GDP in 2007 from 43.9 percent in 2006.

France Inflation April 2008

2008-05-14T10:29:00.000+02:00

France's inflation rate stayed close to a 12-year high in April, sustained by rising energy and food costs. Consumer prices climbed an annual 3.4 percent, down from 3.5 percent in March, based on European Union-harmonized methods, Insee, the national statistics bureau, said today in Paris. The March inflation rate was the highest since 1996, when Insee began reporting the data. Prices increased 0.4 percent from March.

French Industrial Output March 2008

2008-05-09T15:02:00.000+02:00

Industrial production in France fell for the first time in four months in March as global demand waned and domestic spending lost momentum. Production at factories and utilities, which accounts for 15 percent of the economy, slipped 0.8 percent from February, when it gained a revised 0.5 percent, the national statistics bureau, Insee, said today in Paris.

The decline in French output in March limited the increase for industrial production in the first quarter to 0.3 percent, Insee said.

French manufacturing, which excludes energy and food output, fell 1.5 percent on the month, Insee said today. From a year earlier, industrial output rose 1 percent and manufacturing increased 0.4 percent.

The decline was led by a 2.9 percent slump in car output and a 3.3 percent decline in clothes and leather goods, the data showed.

Manufacturers, who are facing rising production costs from the near doubling in crude oil prices in the past year, are also feeling the pinch of a euro worth almost $1.55. France's trade deficit widened to a record in March, hurt by a slump in exports, and consumer spending on manufactured goods slipped 1.7 percent in the month.

France Services PMI April 2008

2008-05-07T19:06:00.000+02:00

Eurozone service sector growth held steady at a slightly slower pace in April as faster growth in Germany contrasted with weakness elsewhere; Spain in particular stood out and reported record job cuts.

The RBS/NTC Eurozone Services Business Activity Index rose from 51.6 in March to 52.0 in April, coming in slightly above the earlier flash estimate of 51.8. However, the rise still indicated only a very modest acceleration in growth, with the rate of increase remaining weak by historical standards of the survey (and only slightly above the average reading for Q1, which had been the weakest quarter since Q2 2003).

France

France's service sector grew at its weakest pace in nearly five years in April as an economic slowdown stemmed the flow of new business, a NTC/CDAF survey showed on Tuesday. Their Purchasing Managers' Index of the French services sector dropped sharply to 52.8, its lowest since August 2003, from 57.3 in March.

"The subdued rise in activity during the latest month marked a significant turnaround from the resilience seen in the first quarter of the year and suggests that deteriorating economic conditions may finally be taking their toll on France's dominant service sector," NTC said in a statement.

New business growth slowed to its weakest since September 2004 as firms reported a general softening in demand and a dearth of client inquiries.

"It looks like consumers have reined in spending on services quite significantly," said Chris Williamson, chief economist at data compiler NTC.

Slowing growth is also jeopardising President Nicolas Sarkozy's goal of cutting unemployment, and the NTC/CDAF survey showed firms in the service sector are already responding to the weaker economic climate by scaling back hiring.
In a sign that inflation pressures are persisting, the survey showed service sector firms continued to raise the prices they charged as their input costs kept increasing.

EU Economic Sentiment Indicator April 2008

2008-05-05T15:24:00.000+02:00

The European Commission’s eurozone “economic sentiment” index which fell sharply from 99.6 in March to 97.1 in April – the lowest level since August 2005. With the indicator regarded as good guide to growth trends, the unexpectedly steep decline pointed to a marked deceleration in economic activity.

Still, eurozone countries show varying performances. Economic sentiment in Spain, which is at risk of a serious house price correction, has fallen to the lowest level since late 1993. But sentiment in Germany and France remains relatively robust – falling to the lowest levels since February 2006 and December 2005 respectively.

As can be seen from the above chart, Italy's economy continues - like Venice - to sink steadily, while the two eurozone economies which had the strongest housing booms head steadilyoff the cliff, with Spain having poll position, and by quite a long margin

France Retail PMI April 2008

2008-04-30T19:25:00.000+02:00

The Bloomberg Eurozone Retail Purchasing Managers' Index, an indicator based on a mid-month survey of economic conditions in the euro area retail sector and providing data one month ahead of government issued figures, fell a record 6.4 points from 48.2in March to a survey low of 41.8 in April. This signals the steepest monthly decline in sales since data were first collected in January 2004.

Retailers blamed a combination of bad weather, the timing of Easter, poor consumer confidence, squeezed household budgets due to rising food and energy prices for the steep drop in sales at the start of the second quarter. In Italy, ongoing political uncertainty was an additional factor cited by retailers.

French retail sales showed the weakest decline of the three countries; nevertheless sales fell at the fastest monthly rate since January 2006 (the index slumped from 53.3 to 46.2). The April fall contrasted with robust increases in sales over the first quarter.

The combination of rising non-staff costs and weak sales caused employment in the Eurozone retail sector to fall marginally in April, following marginal gains in the first three months of the year (the index fell from 50.1 to 49.5). A slight rise in French retail employment was countered by a small decline in Germany and a larger fall in Italy, where the rate of job losses in the past two months has been higher than at any time since late 2004.

The fastest inflation since 1996 is eroding demand at a time when the economy is already slowing. The European Commission yesterday forecast growth of 1.6 percent this year after 1.9 percent in 2007.

Consumer confidence in France dropped to a record low in April, Insee, the national statistics agency, reported today. The measure of consumer sentiment fell to minus 37, the lowest since the index was introduced in 1987, from minus 36 in March.

France Consumer Confidence April 2008

2008-04-29T15:08:00.000+02:00

French consumer confidence fell to its lowest in more than two decades in April as households became gloomier about the outlook for living standards.
More bad news for the euro zone's second biggest economy came in signs that the housing market was cooling rapidly and predictions that industrial demand would slow in the second quarter against a backdrop of worsening export competitiveness.

A composite indicator of consumer confidence in France slipped to -37 in April from -36 in March, according to a monthly survey carried out by statistics office Insee.

The indicator represents the balance in percentage points between consumers having experienced, or expecting, a rise in their living standard and those seeing a decline.

The indicator on consumers' past personal financial situation was -29 in April, up from -30 in March, while the outlook for personal finances was -16, down from -14 a month earlier.

Past French standard of living was -69, up from -71 in March, while the outlook for the French standard of living stood at -43, down from -40 a month earlier.

The Insee indicator showing the inclination to buy consumer goods was steady at -28.

Accelerating inflation is fanning concern about how far incomes will go, growth is slowing, public sector jobs are being cut, and the government is seeking to extend the number of years people work before they earn a full pension.

"France is important for the euro zone at this stage since the fact that it has held up well has prevented the euro zone from slowing down more than it has. Signs that French economic activity is slowing or improving are therefore important and will affect the direction the euro zone economy takes."
Jacques Cailloux, chief euro zone economist at RBS in London.

This slowdown was underscored by the latest Housing Ministry data which showed the number of housing starts fell 9.9 percent in the three months to end March compared with a year earlier. Economists said that while the series had been volatile in recent times, it showed a clear slowdown in the housing market.

"The data may be overstating things but house price and lending data are suggesting the housing market is past its peak and are pointing to a soft landing," Cailloux at RBS said.

French House Prices

2008-04-29T14:02:00.000+02:00

There was an interesting piece in the Financial Times this morning about how the French property market was basically different from the Spanish and the Irish ones, and that no major "correction" in prices was to be anticipated in France (as opposed to a slight reduction in prices). Basically I think it would be a mistake to talk and think in terms of a eurozone wide property market (Germany and Italy had no major property boom in recent years) and factors like demographics and the lending attitude of the banks (fixed rate vs variable mortgages, loan to value ratios etc) seem to have been just as important as the lending rate set by the ECB (which has, of course, been the same for everyone.

Lending for house purchases across the eurozone rose at an annual rate of just 6.1 per cent in March, down from 6.6 per cent in the previous month (and we don't know the month on month changes, which are the ones that really matter), the European Central Bank reported on Friday. That was the weakest since at least 2000, when monthly data were first compiled.

In the coming downturn the outlook for the eurozone economies in general could depend crucially on the resilience of France, the 15-country region’s second biggest economy, where prices house prices have been buoyant in recent years, but where the Irish and Spanish (or UK) "excesses" seem largely to have been avoided.

French house price inflation peaked in early 2005 at an annual rate of 16 per cent but has since steadily declined and prices may now be on the point of turning negative if they has not already done so.

Policymakers’ may be deeply worried about the outlook in Spain and Ireland or – beyond the eurozone – in the UK. However, the risk that a dramatic housing market correction will seriously dent French economic growth seems limited.

House prices in France could fall by 3 per cent this year, according to some analysts. Nevertheless, the economic impact of fluctuations in property prices could prove much less pronounced than elsewhere.

France’s home ownership rate is 60 per cent, low compared with its European Union neighbours. Around 90 per cent of mortgages are fixed-rate, one of the highest proportions in the EU, and those that are variable are capped. There is virtually no “equity withdrawal” – which allows consumers to spend from borrowing on the back of the rising value of their homes – since it is tightly restricted.

French economic growth this year will slow, but more because of the pressure facing its corporate sector, for instance from a strong euro, high oil prices and tighter credit conditions.

Still, a slowdown in the property sector would weaken one of the bulwarks of French growth over recent years. The construction sector accounted for 38 per cent of all jobs created in France in 2005-06 and accounted for over a third of France’s 2 per cent gross domestic product growth in 2006.

The monthly survey series by FNAIM, the French National Property Federation, is showing a steady decline in the annual growth rate of property prices, from 3.4 per cent in January to 2.5 per cent in March. But a fall of apartment prices of 1.7 per cent in January has set alarm bells ringing among some analysts.

The French Economy - Acting As The Eurozone Buffer?

2008-04-23T08:35:00.000+02:00

What is really notable about the current eurozone slowdown is to be found - as is ever the case - the details. The first and most notable of these is the way in which inflation is obviously crimping efforts from the ECB to use conventional monetary policy (namely lowering interest rates) to help the ailing Spanish (see here) and Italian (see here) economies. As a result the Sabre rattling continues in Frankfurt and the euro continues to move onwards and upwards, touching an all time high of $1.6019 yesterday (for a fuller exploration of some of the issues which arise here, see Claus Vistesen's recent The ECB - One Play-Book, One Page, One Purpose post).

It also doesn't seem to me to be without some significance that what sent the euro off upwards again yesterday was a comment from French Central Bank Governor Christian Noyer.

“Our big problem is to ensure that inflation returns below 2 per cent next year,” Christian Noyer told French radio. “If needed, we will move interest rates.”

What Noyer seems to be saying is that the French economy is weathering the storm, not only were exports up in February, but unemployment continues to fall, and industrial output continues to surprise on the upside, while the French services sector remained the one bright spot on an otherwise darkening eurozone horizon, at least according to the March reading of the Royal Bank of Scotland purchasing managers index. So it is the underlying strength of the French economy at the present time which is the real news behind the headlines of the record euro level we saw yesterday.

In fact the substantial appreciation in the value of the euro (which should have some kind of disinflationary pass-through impact) may well make an actual rise in ECB interest rates unlikely in the near future, but it is interesting to note that - in a significant turnround - the financial markets have started to price-in the slight possibility of an increase in ECB rates later this year. The ECB meanwhile mainatins the posture that the economic uncertainty surrounding the current outlook makes the direction of its next interest rate move unclear.

What really caught my eye this morning, however, was the following comment in the Financial Times:

France’s economic outlook could play an important role in the ECB’s thinking. Spain is facing a sharp housing market correction, while German economic growth is thought to have been surprisingly strong at the start of the year. “The fact that France is holding up in the middle is probably preventing eurozone [economic] numbers from moving significantly to the downside. It is a bit of a buffer,” said Jacques Cailloux at Royal Bank of Scotland.

France may be a bellwether for the eurozone because its relative resilience lies in the absence, so far, of a credit crunch or sharp slowdown in consumption.

Basically what is strange about all this is how it is precisely the French economy (in terms of the durability of its domestic consumption) that is really holoding things together in the eurozone right now (along with German exports - but NOT German consumption - of course). What is most striking from where I am sitting is how little thought all those big-name widely-quoted economists seem to be giving to the implications of what is happening. Claus Vistesen and I would argue - naturally - that the apparent resilience of the French consumer (how can I keep my head, when all around me are losing their's) has someting to do with France's comparatively favourable demographics. But perhaps others who do not share this view would also like to offer some sort of explanation - for reasons of intellectual self-respect if for no other reason.

Basically I find it hard to see - if I follow the standard explanations - how it is that an economy that everyone has spent the last five years or so trashing - for its labour market inefficiencies, its profligate government spending and its high level of state intervention - turns out to be doing just fine (or nearly so), while all around are starting to visibly wilt.

Obviously there is more to this story than simple demographics. The French banking system didn't invent its own version of the Spanish "cedulas hipotecarias", and wasn't offering such a huge percentage of variable mortgages, and wasn't offering so many 100% (or 110%) Loan to Value mortgages. That is the French banking system seems to have been more (or better) regulated (and that used to be a dirty word), and as a result isn't facing any imminent danger of fiancial meltdown since - desite having the same nominal interest rate as Spain - French householders were not sent of on a "buy one, and buy a second what while you're at it" housing spree of anything like the proportions which we have seen in Spain and Ireland. But again most commentators don't even seem to be even picking up on this part.

The roots of this recent renaissance of the French economy in economics discourse in fact go back to the autumn of last year, when the Financial Times ran a rather interesting story (see my original blog post here) which pointed out that:

"The size of the British economy has slipped below that of France for the first time since 1999 thanks to the slide in the value of the pound. Sterling’s rapid fall to 11-year lows against European currencies has also pushed Britain into sixth place in the world. The US, Japan, Germany, China and France all had larger economies than the UK in the third quarter of 2007."

Basically the facts behind the story are that in 2006 French GDP was worth €1,792bn compared with £1,304bn for the UK. With sterling worth €1.47 on average in 2006, this put the UK economy comfortably 6.7 per cent ahead of the French one. But with sterling on the slide - it has fallen by more than 10 per cent against the euro in the past six months (to the current €1.32 to the pound), the UK economy entering 2008 is now 4 per cent smaller than France's.

And again there is a bigger picture story behind the headlines here, one that has to do with the fact (as Claus Vistesen tried to sketch out here) that France, far from being the "sick man of Europe" in economic terms, and as a result of some very important underlying macroeconomic structural features, is now enjoying a new lease of life.

This view must surprise some people, since it is obviously a long way away from a lot of conventional wisdom which is being written on the matter. Basically, if you follow the institutional reforms discourse, then the UK should be streaking ahead of France following the latters failure to grasp the nettle and "reform" itself (something, please note, that the present author considers highly desireable in and of itself). But such reforms only focus on micro level phenomena, and do not take into account certain key macro economic trends, and in particular they seem almost never to take into account important macro level phenomena like comparative demographic shifts. What this means quite simply is that something here isn't being measured as it should be, and the outcome is bad results and bad forecasts.

This use of bad arguments (or at best partial ones) also makes it very difficult to persuade some people - in this case French voters - to do something that they are evidently very reluctant to do, and that is support the reform process. When your key argument is flawed, and you can't point to the benefits you would like to point to (even if in fact many of the reforms being proposed are quite necessary, especially in terms of the long term sustainability of the health and pensions systems). This peculiar situation was also recently highlighted by the move of those eternal "bette noires" of the international financial institutions - Argentina and Thailand - when they complained only last year to the world bank that since the normal "competitiveness" indexes were giving them very bad ratings, while at the same time their economies were putting in strong performances, then there must be something wrong with the indexes. I imagine they are still waiting for a coherent reply.

Basically the whole "institutional reforms" story is wrong, not because such micro level competitiveness-oriented reforms are unnecessary (they normally are), but because they are only part of the picture, and thus offer a very misleading perspective. A classic example of what I am talking about was also offered by the Financial Times's recommendations to Spain on how to solve the economic mess which the Spanish economy is now headed towards (incidentally, I would point out here that I have nothing against the Financial Times, and I am simply quoting their correspondents since they form part of what I consider to be a much more general problem..

Spain has been content to enjoy the benefits of cheap credit and strong European demand for its goods and services. Unlike France, it has not embarked on the structural reforms needed for longer lasting prosperity.

Mr Zapatero pretends these are not needed. But, if re-elected, he should rethink. Generous tax cuts should be avoided in order to maintain a mildly restrictive fiscal stance. Measures to foster competitiveness are essential. These should include dismantling barriers to competition in retailing, transport and energy. He should ditch a preference for national champions.

Persistent weakness in productivity growth must be addressed too. Recent steps to expand Spain’s small technology base, promote entrepreneurship and bolster its ossified education system are positive. But universities need more independence. Allowing companies to opt out of collective wage deals would make the labour market more flexible. This is far from a comprehensive manifesto. But it is the least Spain must do if it is to remain one of Europe’s pacesetters

Now I think we could pass quietly over the little detail that France is now being cited as a country which is benefiting from structural reform. What is notable about the kind of "rescue package" being proposed for Spain is that it is largely ignores the substantial underlying macro economic questions which are in play - like the health of the banking system, some evaluation of the impact of "financial efficiencies", interest rate policy at the ECB, the value of the euro, the presence of five million immigrants (who have largely arrived over the last 6 or 7 years at just the same time as the current account deficit - which the FT does mention -has balooned), the role of the eurosystem and covered bonds in making cheap interest loans available at what were effectively negative real interest rates, etc, etc, etc.

Evidentaly non of this is directly Mr Zapatero's fault, any more than it was Mr Aznar's fault. This is not the moment to attempt a fuller analysis of Spain's current problems - you can find a first attempt at getting to grips with these here. Rather my objective is to point out that basing yourself on micro economic analysis alone you will never get to the heart of major economic issues which face us. And this is what the current mainstream economic discourse seems to do, spilling in the process an excessive amount of ink about shop opening hours, flexible labour contracts, and privatisation of "national champions" (all of which, please note, may well be a good idea, but I can tell you now, none of these are going to get Spain out of the problem which is about to arrive, nor, for that matter, will they prevent the inflation bonfire from currently roaring away in Eastern Europe which I was drawing attention to in my Slovakia post yesterday).

Update

Well just to prove that nothing is ever as straightforward as it seems to be at first sight yhe French national statistics office - INSEE - announced earlier today that French consumer spending on manufactured goods declined more than expected in March, as accelerating inflation continues to undermine households' purchasing power.

Spending by consumers fell 1.7 percent in March from February, when it rose a revised 1.3 percent from January. However on an annual basis consumer spending rose 1.2 percent in March from March 2007. Spending also increased 0.6 percent during the first quarter over the last quarter of 2007, while in Q4 2007 there had been a 0.1 percent drop over the quarter before.

What this means - basically - is that France is not entirely immune from the global slowdown, but then it was never my point to say that it was. It is simply that French domestic consumption is proving to be relatively resilient, and it is this part I find interesting and in need of an explanation.

The French government expects the economy to expand 1.7 percent to 2 percent this year, a forecast Christian Noyer has called "maybe a bit optimistic".

France Inflation March 2008

2008-04-15T14:34:00.000+02:00

French inflation accelerated more than many economists anticipated in March, reaching the fastest pace in at least 12 years and underscoring the European Central Bank's reluctance to cut interest rates.

Consumer prices climbed by an annual 3.5 percent, up from a rate of 3.2 percent in February, based on European Union- harmonized methods, Insee, the national statistics bureau, said today in Paris. That's the fastest pace since 1996, when Insee began reporting the data, and matched the euro region's rate. Prices increased 0.8 percent from February, which was also the biggest monthly gain on record.

French energy prices increased 2.7 percent on the month and 12.7 percent from a year earlier. Food costs rose 0.4 percent from February and 5.3 percent on the year, today's report showed. Services such as health care and transport added 0.2 percent in March from the previous month, and the cost of manufactured goods climbed 1.2 percent, Insee said.

ECB policy makers including Yves Mersch, Juergen Stark and Axel Weber have rebuffed a call by the International Monetary Fund to follow the U.S. Federal Reserve and the Bank of England in cutting rates to bolster economic growth. The Frankfurt-based ECB last week left its benchmark rate at a six-year high of 4 percent, even as a looming U.S. recession, record oil prices and the euro appreciation threaten to choke economic expansion.

Following the news investors raised bets that the ECB would stand pat through 2008. The yield on December interest-rate futures rose to 4.18 percent from 4.14 percent yesterday.

French Industrial Output February 2008

2008-04-10T12:49:00.000+02:00

Industrial production in France unexpectedly climbed for a third month in February on higher consumer spending and record exports. Production at factories and utilities, which accounts for 15 percent of the economy, rose 0.3 percent from January, when it gained a revised 0.6 percent, the national statistics bureau, Insee, said today in Paris. French manufacturing, which excludes energy and food output, rose 0.3 percent on the month, led by a 1.3 percent gain in equipment manufacturing, Insee said. From a year earlier, industrial output rose 2 percent and manufacturing increased 1.9 percent. January's industrial production was initially reported to have risen 0.5 percent.

Economic growth in France has weathered a U.S. slowdown, record oil costs and euro appreciation, sustained by 9 billion euros ($14.2 billion) in tax cuts introduced by President Nicolas Sarkozy and declining unemployment. Joblessness in France fell to a 24-year low in the fourth quarter.

The International Monetary Fund and French government have cut their 2008 growth forecast in the past two weeks, with the IMF seeing a slowdown to 1.4 percent and French officials forecasting as low as 1.7 percent.

France Trade Deficit February 2008

2008-04-07T10:49:00.001+02:00

France's trade deficit shrank in February to the lowest in nine months as exports rose to a record, led by sales of food, pharmaceuticals and equipment to Africa. The gap between exports and imports was down to 2.77 billion euros ($4.3 billion) from 3.18 billion euros in January, the Trade Ministry in Paris said today.

Imports fell 0.2 percent to 39.75 billion euros and exports climbed 0.9 percent to 36.98 billion euros. Airbus SAS shipped 23 planes worth 1.05 billion euros in February, following 23 planes worth 1.18 billion euros in January.

France Services PMI and EU Economic Sentiment Indicator March 2008

2008-04-03T18:42:00.000+02:00

European services growth slowed in March after the euro rose to a record and the U.S. economic downturn deepened. Royal Bank of Scotland Group Plc said its index of growth in service industries from banks to airlines fell to 51.6 from 52.3 in February. That's lower than an initial estimate of 51.7 published March 20. The index is based on a survey of purchasing managers and a reading above 50 indicates expansion.

France remained the only one of the Eurozone’s four largest national economies to see growth holding up close to that seen last year, with its rate of expansion continuing to far exceed that of the other big-four. Business activity in the German service sector also continued to expand, but the rate of growth remained well down on last year, resuming an easing trend in March to register the third weakest monthly growth of the past three years. Spain and Italy, on the other hand, both reported falling levels of business activity for the third and fourth consecutive month respectively. The rate of decline in Italy was the third steepest in the past three years. Meanwhile, a marked acceleration in the rate of decline was seen in Spain to a pace far above that of Italy and the fastest in the survey’s eight-and-ahalf year history.

New business growth slowed among French service companies in March although the services sector as a whole continued to expand at a fairly robust pace. The NTC/CDAF Research's Purchasing Managers' Index (PMI), which covers businesses ranging from telecoms to transport, fell to 57.3 in March from 58.2 in February, but kept above the 50 mark separating growth from contraction for a 57th month running.

The new business index fell to 56.6 in March from 57.2 in February, showing demand in the euro zone's second largest economy is easing but still remains solid.

"This report seems to suggest that there's still some robust spending occurring, certainly on services," said NTC's chief economist Chris Williamson.

While consumer confidence hovers at its lowest level in over 20 years, the French Statistics Office (INSEE) expects French households to remain resilient and buoy the economy this year by dipping into their savings. While surveys consistently show the French are worried about high inflation eroding their purchasing power, these concerns evidently did not feed into actual spending in February, which rebounded according to the latest data from INSEE.

Inflation made its presence felt in the March PMI, as the input price sub-index rose to its highest since November, and the 'prices charged' index rose to its highest level since January. But NTC's Williamson said that France's rising prices had yet to have negative effects on other elements in the service sector such as employment, which rose on the month.

"If non-staff costs are rising, they may look at trimming wage costs. But that doesn't seem to be happening here because the employment index is still remaining at this robust level," he said

The European Commission has also now reported its eurozone “economic sentiment” indicator for March, with the composite number bouncing back a little from the February reading which its lowest level since December 2005. The indicator, which gauges optimism across all economic sectors and is regarded as a good guide to likely future trends, was back up to 102 after falling to 100.1 in February from 101.7 in January. As we can see in some of the counries shown in the chart below, the picture is a mixed one, with Germany for the time being holding reasonably stable, climbing back to 104 from 103.7 in February, Ireland hovering nervously, Italy continuing its steady downward path, and Spain continuing to head steadily off the map. The March reading in Spain was 83.9 which was down from 87.5 in February. I suppose here it is a case of how low can you go before you hit bottom. Yet awhile I suspect.

France is also holding up fairly well rising to a composite 105.6, from 105.2 in February.

France Manufacturing PMI March 2008

2008-04-01T14:38:00.000+02:00

French manufacturing expanded at its slowest pace in five months in March as growth in output and new orders weakened. The NTC/CDAF Purchasing Managers' Index, which measures the health of French manufacturing, fell to 51.9 -- slightly below the 52.0 both predicted by economists last week and given in a flash estimate 12 days ago -- from 53.8 in February. This left the PMI still above the 50.0 mark separating growth from contraction though below its 53.1 long-term series average.

European manufacturers are facing at the moment," said Chris Williamson, chief economist at data compiler NTC. But he added there were warning signs for the months ahead: "Order books are beginning to stagnate, and it's a pretty stark contrast when you compare it to even January's figure."

The output index tumbled to 53.4 last month, its lowest since October, from 56.0 in February. The slowdown in manufacturing growth was accompanied by price pressures that saw firms struggle to handle rising costs while keeping factory gate prices competitive. Input prices jumped to a 20-month high in March, rising to to 74.7 from February's 68.8, while output prices fell to a three-month low of 57.3.

"Over half of all firms recorded a rise in costs during the latest survey period, which they attributed to higher prices paid for oil, steel and general raw materials," NTC said in a statement. "Faltering demand and competitive pressures were cited as factors limiting pricing power and contributing to an easing in the rate of charge inflation to the lowest in three months," it said.

France Retail PMI March 2008

2008-03-28T13:45:00.000+01:00

European retail sales fell in March as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed. The gauge of sales growth in the euro region declined to a seasonally adjusted 48.2 from 52.4 in February. A reading below 50 indicates contraction. Sales also fell from 2007, according to the index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd.

In France, retail sales rose for the third month running, with the increase supported primarily by higher food & drink sales values. The rate of growth was weaker than the previous two months (the index slipped from 58.8 in February to 53.3), but nonetheless remained robust and in marked contrast to the contraction seen throughout Q4 of last year.

France Consumer Confidence March 2008

2008-03-28T10:55:00.000+01:00

Consumer confidence in France fell to a record low in March as accelerating inflation squeezes purchasing power. A gauge of consumer sentiment fell to minus 36, the lowest since the index was introduced in 1987, from minus 35 in February, Insee, the Paris-based national statistics office, said today.

Prime Minister Francois Fillon said this week the government is cutting its 2008 economic forecast to as low as 1.7 percent, citing the fallout from the U.S. housing recession. Accelerating inflation has deepened concern among French voters that President Nicolas Sarkozy will fail to fulfil his pledge to boost living standards, opinion polls have shown.

More than 80 percent of French people said they saw their purchasing power decline in the last 12 months, according to a poll last month by Paris-based Ifop institute. That was up from 65 percent in November and from 59 percent in January 2007.

France Inflation February 2008

2008-03-12T20:12:00.000+01:00

France's inflation rate remained at a 12-year high in February as energy and food costs reached records. Consumer prices climbed by an annual 3.2 percent, the same as in January, based on European Union-harmonized methods, Insee, the national statistics bureau, said today in Paris. That's the fastest pace since 1996, when Insee began reporting the data. Prices increased 0.2 percent from January.

French energy prices climbed 18 percent from a year earlier in February and food rose 4.8 percent, today's report showed. Services such as health care increased 2.2 percent.

The price increases have affected consumer morale, sending confidence to a record low last month.

It has also hurt the popularity of French President Nicolas Sarkozy, who made purchasing power the centerpiece of his presidential campaign. Voters dealt him a setback in the first round of local elections March 10, preferring candidates from the opposition Socialist Party and its allies.

France Manufacturing and Services PMI February 2008

2008-03-09T22:56:00.000+01:00

The February reading on the RBS/NTC Eurozone Manufacturing PMI - Purchasing Managers' Index - (a composite indicator designed to provide a single-figure summary of business conditions across the eurozone) registered 52.3 . The PMI was in line with the earlier flash reading and down from 52.8 in January, signalling a slight weakening in the rate of expansion to the second weakest level registered in the past two-and-a-half years. PMI readings among the big-four euro nations showed the widest variation for seven-and-a-half years, with continued solid growth in Germany and, to a lesser extent, France contrasting with near-stagnation in Italy and an accelerating rate of contraction in Spain. The PMI for Italy hit a two-and-a-half year low while Spain saw the sharpest rate of contraction since December 2001.

In France a dip in foreign orders and rising inflation dragged on French manufacturing activity in February the survey showed. The NTC/CDAF Index slipped to 53.8 in February from 53.9 in January, but kept above both the 50.0 mark separating growth from contraction and the series' long-term average of 53.1.

A sub-index for output fell to 56.0 in February from 56.4 in January, hitting its lowest point since November 2007. Chief NTC Economist Chris Williamson said France's manufacturers still lead Germany, Spain, and Italy in output, but warned the months ahead could present more problems.

Domestically, hiring in France picked up to its highest level since last July as companies took on staff to keep up with backlog of work. This is broadly consistent with the positive employment data we have seen coming out of France of late, and seems to suggest the contraction in umemployment will continue, at least for the time being.

Inflation concerns also rose in the February survey, with the input price index rising to 68.8 from 68.4 in January to reach its highest level since July 2007 and the output price index climbing to a 12-month high of 58.6 from 57.8. Rising prices have been the main complaint for French consumers and have driven recent falls in morale and spending.

Growth in France's services sector rebounded in February as sustained demand boosted activity from the two-year low it had hit a month earlier, and the NTC/CDAF Services Index (PMI) rose to 58.2 in February from 56.6 in January, clocking up a 56th consecutive month above the 50 floor for growth and bringing the 2008 level near to 2007's 58.6 average.

A sub-index that tracks new business growth rose to 57.2 from 56.1 in January, well off levels above 60 hit in recent years but still driving a service sector boom that has outshone Germany, Italy and Spain, the other major euro zone economies. "The rate of growth remains quite impressive," said Chris Williamson, chief economist at NTC.

Even so, France has been hit by several weaker-than-expected economic reports in recent weeks, especially with regard to consumer spending which drives a large part of the service sector. French growth slowed in the fourth quarter of 2007 in step with the global economic downturn, while January consumer spending suffered its biggest drop in over a year and February consumer morale fell to its lowest in more than 20 years.

Purchasing managers were more worried in February than in previous months, the survey showed. Its business expectations index fell to its lowest level in six months. "Because demand does seem to be more resilient in France among consumers, we've got more inflationary pressures," said NTC's Williamson. "The PMI's price indexes are still at worrying levels."

France Unemployment Q4 2007

2008-03-06T13:38:00.000+01:00

France's unemployment rate declined more than expected in the fourth quarter of 2007 - falling to 7.8% - as measured by the labour force survey methodology, sustaining in the process consumer spending to some extent as economic growth slows.

The jobless rate dropped from a revised 8.2 percent in the previous quarter, Insee said today in Paris. Excluding France's overseas territories, the rate fell to a 24-year low of 7.5 percent from a revised 7.8 percent, based on International Labor Organization standards.

The French rate of economic growth fell in the fourth quarter and the International Monetary Fund cut its growth forecast to 1.5 percent this year from 1.9 percent in 2007. President Nicolas Sarkozy is counting on increased hiring to boost his popularity in municipal elections which are due this month.

Sarkozy's popularity has tumbled to the lowest since he took office in May as rising prices hammered consumer confidence. His approval ratings fell 4 percentage points to 38 percent this month, compared with 65 percent in July, a CSA/Le Parisien/i-Tele opinion poll showed today.

Among the population aged 15-64, 64.8 percent had a job in the fourth quarter, up from 64.4 percent in the third and 63.8 percent a year earlier, today's report showed. The previous quarter's overall rate was revised down from 8.3 percent and the mainland rate from 7.9 percent.

France Retail PMI and Consumer Confidence February 2008

2008-03-02T12:23:00.000+01:00

Well, this week from France we have two different leading indicators - consumer confidence and retail sales - and they seem to be moving in different directions, which is rather strange to say the least.

Perhaps the clearest indication that the French economy may not be holding up as well as it was is to be found in the latest reading for France on the EU Economic Sentiment Indicator. France reported a deterioration in confidence, down to 105.2 in February from 107.0 in January.

Consumer confidence in France also fell to a record low in February as the fastest inflation in 12 years squeezed purchasing power. A gauge of consumer sentiment fell to minus 35, the lowest since the index was introduced in 1987, from minus 34 in January, according to the latest data from Insee, the Paris-based national statistics office.

More than 80 percent of French people said they saw their purchasing power decline in the last 12 months, according to a poll by Paris-based Ifop institute. That is up from 65 percent in November and from 59 percent in January 2007.

The sub component measuring consumers' sentiment about their current standard of living declined to minus 68 from minus 65, the INSEE report showed, while the sub-index evaluating the outlook for living standards rose to minus 42 from minus 44. The personal financial situations component was unchanged at minus 25. The report showed more people may delay big purchases as that component fell to minus 26 from minus 24.

People are evidently worried about rising prices, and President Nicolas Sarkozy, who made purchasing power the centerpiece of his presidential campaign, is facing his lowest popularity rating since he took office in May.

Consumer prices climbed by an annual 3.2 percent in January, according to the European Union-harmonized index, up from 2.8 percent in December and the fastest since the statistics office began reporting the data in 1996.

Food costs jumped 4.2 percent in January, compared with a 3.1 percent increase in the prior month. Meanwhile, oil prices surged to a record above $102 a barrel last week as the dollar fell below $1.50 against the euro for the first time.

Obviously all of this is causing quite a fuss in France, and a study by the Institut National de la Consommation published last week showed French supermarket food prices are rising faster than raw-material costs. The Paris-based consumer group found the biggest price jumps were for baby milk, pasta, ham and yogurt, which climbed between 40 percent and 48 percent in the six weeks to Jan. 9, based on a survey of 1,055 food prices on the Web sites of five of France's biggest chains.

That this uptick in inflation is bound to give all policymakers a major headache was perhaps underlined by the recent admission by French President Nicolas Sarkozy, who has been one of Jean Claude Trichet's strongest critics, that accelerating inflation in France "worries me". So it should do, and especially since it is seriously going to restrict the hands of policymakers over at the ECB.

Prime Minister Francois Fillon said during the week that the French government is investigating food-price increases and suppliers' profit margins, but Insee's consumer report showed consumers are not particularly reassured by government promises or by the firm ECB stance at this point, since they anticipate that inflation may continue to accelerate with the component for price expectations dropping to minus 23 from minus 11.

To some extent these concerns by French consumers are also borne out by the latest data for French producer prices also released by INSEE this week. French producer prices rose 0.5% month-on-month in January, up from a revised 0.1% rise in December. Producer price inflation for December was revised down from 0.2% initially estimated. Producer prices rose more than the 0.4% increase expected for January. On an annual basis, producer prices climbed 4.9% in January, while economists were looking for 4.8% growth.

Industrial producer prices, excluding energy and agri food, were up 0.5%, following a 0.1% fall in December. The annual growth in the index stood at 1.6%. Industrial import prices gained 0.4%, after recording 0.4% fall in December. Over the last year, import prices rose 4.6%. Excluding energy and agri food, import prices increased 0.4% month-on-month and decreased 0.5% from the prior year. What is, I suppose, most disturbing about this whole picture is the way in which some inflation components are accelerating even as the euro continues to reach ever newer highs, which should, in principle, be serving to slow inflation.

Not everything coming out of France this week has been unequivocably bad news though, since the retail sales purchasing managers index shot up in February.

In fact French retail sales advanced the most in 20 months in February, driven by declining unemployment (another piece of positive news) and seasonal discounts, the NTC Economics compiled Bloomberg purchasing managers index showed. The measure of sales climbed to a seasonally adjusted 58.8, the highest since June 2006, up from 56.2 in January, the survey which is based on the responses of 390 retail executives showed at the end of last week. A reading above 50 indicates expansion. Possibly also of note here was that retailers, who stressed that they faced higher purchasing prices, reported declining margins, with this index component decreasing to 48.8 from 50.8 in January. Some of them also reported squeezing prices to attract customers.

But at the end of the day, France's steadily improved employment numbers may well help to continue to underpin consumption to some extent.

French Business Sentiment and Spending on Manufactured Products Fall

2008-02-22T12:43:00.000+01:00

French business confidence fell in February to its lowest level in 13 months and spending on manufactured goods laos fell in January as accelerating inflation and slowing economic growth took their toll across the European economy. Insee, the Paris-based national statistics office, said today its index of sentiment stood at 107, the lowest since January 2007 and down from last month's revised 108. Spending on manufactured products dropped by 1.2 percent, the most since September 2006, Insee said in a separate report. Both these figures were worse than most economists had been expecting.

Also in its latest interim forecast the European Commission yesterday cut the growth outlook for France to 1.7 percent from 2 percent in November.

Accelerating inflation, which reached 3.2 percent last month, the fastest pace in at least 12 years, is also weighing on confidence as it squeezes spending by consumers, who account for the biggest part of the economy.

Purchases of manufactured goods, which contribute about 15 percent of gross domestic product, fell 1.2 percent from December. Rising gasoline and food prices and higher borrowing costs dented households' purchasing power.

The January spending drop was led by cars, which slipped 8.7 percent as consumers had bought more than the normal number of automobiles in December in order to beat a "green tax" on high-polluting vehicles that came into effect on Jan. 1. The January rate compared with an increase of 6.7 percent in December. On the other hand, purchases of clothes and leather rose 2.3 percent in January, helped, it seems, by post-holiday discounts.

Still, France may yet weather the coming storm rather better than Spain, Italy and Germany, as record-low unemployment and President Nicolas Sarkozy's 9 billion euros ($13.2 billion) worth of tax cuts buffer the economy against the slowdown. French growth may outpace Germany this year for the first time since 2005, the commission forecast, yesterday, and Prime Minister Francois Fillon reitereated that he hasn't reduced the government's forecast for growth of about 2 percent this year. Personally all this seems much more reasonable to me than some of the other "official" forecasts we are getting at the moment, since France didn't have so many excesses (as eg Spain) on the upside, she may well not feel the contraction so sharply on the downside, and having a relatively younger population and a more stable population pyramid than either Italy or Germany, France has obviously much more short term leeway on the fiscal side, although in the medium term serious structural reform to the health and pensions systems are obviously needed.

France Inflation January 2008

2008-02-21T10:33:00.000+01:00

French inflation accelerated in January to the fastest pace in at least 12 years, led by higher food and energy costs.

Consumer prices climbed by an annual 3.2 percent, up from 2.8 percent in December, based on European Union-harmonized methods, Insee, the national statistics bureau, said today in Paris. That's the fastest since 1996, when Insee began reporting the data. Prices were unchanged from November.

In France, energy costs climbed 12.3 percent in January on the year, while fresh food costs jumped 3.3 percent and overall food costs added 4.4 percent. Tobacco prices rose 6.3 percent.

Inflation in the euro region quickened to 3.2 percent in January, the fastest in 14 years. The International Monetary Fund yesterday forecast consumer prices would increase an average 2.3 percent in France this year compared with 1.6 percent last year.

France GDP Q4 2007

2008-02-15T10:28:00.000+01:00

The economic expansion in the euro area's two largest economies cooled in the fourth quarter, marking the start of a slowdown that may deepen in 2008. Gross domestic product in Germany, Europe's biggest economy, rose 0.3 percent from the third quarter, when it increased 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Expansion in France also eased to 0.3 percent, from an 0.8 percent rate in the second quarter according to INSEE.

In France, consumer-spending growth eased to 0.4 percent in the fourth quarter from the 0.8 percent in the third. Corporate investment rose 1 percent, after 1.1 percent in the third. Exports fell 0.6 percent after having risen 1.3 percent in the third quarter. So the trade deficit is definitely acting as a drag on growth.

So the expansion in the eurzone economies is losing momentum as a surge in the euro against the dollar makes exports less competitive abroad just as the U.S. economy hovers near a recession and households grapple with faster inflation. The question is, since the French economy never went up as far as the German one during the recent upswing, may we expect it to resist falling so far down during the downswing? This is my impression, but, of course, we are all about to see. Certainly with a relatively younger population than Germany, France may have more leeway on the fiscal front to adopt counter-cyclical policies, much as this may be frowned on from Brussels and Frankfurt. Clearly there is considerable volatility in the quarter on quarter data, but over the longer haul may Frech GDP prove to be the more solid and stable of the pair?

French Industrial Output December 2007

2008-02-11T13:15:00.000+01:00

Well, industrial output in France, while struggling, does continue to some extent to resist the downward trend. Industrial production in France rose in December, helped by gains in auto manufacturing and energy, helping avoid a decline in the quarter.

Production at factories, utilities and mines, which account for 15 percent of the economy, added 0.7 percent to output from November, when it dropped strongly, by a revised 1.7 percent, according to the national statistics bureau, Insee, earlier today. Obviously after Novembers sharp fall, some revound was only to be expected.

Industrial output in what is the eurozone's second-largest economy has fallen in six of the last 12 months, highlighting the way companies' are struggling to maintain competitiveness in the face of the high euro. Evidence for import substitution is everywhere, and the trade deficit widened to a record in December. Year on year total industrial output - including energy - rose 2.4 percent.

The auto-production increase followed a surge in car sales. December car and light-truck sales jumped 17 percent to 220,094. Car production added 3.5 percent in December. Production of consumer goods, though, slumped for a second month, declining by 0.4 percent in December following a 1.9 percent plunge in November.

France Trade Deficit December 2007

2008-02-07T10:32:00.000+01:00

France's trade deficit widened in 2007 to the biggest ever after oil prices and the euro climbed to records in the past year, the Trade Ministry said today.

The gap widened to a record 39.2 billion euros ($57.3 billion) from 2006's revised deficit of 28.2 billion euros, according to a ministry statement. The last annual trade surplus was 1.1 billion euros in 2003.

The December shortfall was 4.3 billion euros compared to a revised 4.6 billion euros in November. Exports fell to 33.1 billion euros from 33.2 billion the previous month as shipments to the Americas dropped to 2.8 billion euros from 3.1 billion euros. Imports were 37.4 billion euros, compared with 37.8 billion.

The Trade Ministry said Airbus SAS shipped 27 planes in December for 1.4 billion euros, up from 21 planes in November for 895 million euros.

France Services PMI January 2008

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Europe's service industries grew at the weakest pace in more than four years in January, as the possibility of a recession in the U.S. weighs on the European expansion. Royal Bank of Scotland Group Plc's services index dropped to 50.6, the lowest since July 2003, from 53.1 in December. A reading above 50 indicates growth.

The slowdown presents a real headache for the view of European Central Bank that the euro region is strong enough to cope with a cooling U.S. economy and that inflation concerns prevents them from following the Federal Reserve into monetary easing. In the U.S., which is the second biggest destination for euro-area exports, the Fed eased monetary policy by the most since 1990 last month, to bolster the economy.

The euro fell as much as 1.1 percent to $1.4671 and traded at $1.4683 at 11:32 in Frankfurt. The Dow Jones 600 Stoxx index extended declines after today's figures, falling as low as 326.33 from 329.13 yesterday.

The national indexes fell across the board with Germany's service industry slumping below the 50 threshold for the first time in 4 1/2 years and Spain's service sector shrinking the most since the survey began in 1999. A composite measure for the euro region fell to 51.8 from 52.7 the previous month, according to the report, which is based on a survey of purchasing managers by NTC Economics.

France was the only major eurozone economy where the services sector to some extent held its gound - although the rate of expansion is slowing. The purchasing managers index for France's services sector dipped to 56.6 in January from 58.9 in December, but continued to indicate that the French services sector is expanding reasonably strongly.

The purchasing managers index for Germany's services sector fell to 49.2 in January, indicating that the sector has entered a period of contraction, market sources said Tuesday. That compares with a reading of 51.2 in December.

The Italian services index fell to a seasonally adjusted 47.9 in January from 49.7 in December, reaching the lowest level since May 2005.

The International Monetary Fund last week cut its euro-region growth estimate by half a point to 1.6 percent, saying the turmoil in financial markets has spread to the rest of the economy. The IMF now expects the global economy to expand 4.1 percent this year, below the 4.4 percent pace projected in October.

France Retail Sales PMI January 2008

2008-01-31T13:43:00.000+01:00

Yet one more time France seems to be different. Even as retail sales weakened or fell all across the eurozone in January, in France they seem to have been rising. European retail sales fell for a fourth month in January as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed. The gauge of sales in the euro region was a seasonally adjusted 48.1, compared with 46 in December. A reading below 50 indicates a decline. The index is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd.

The International Monetary Fund yesterday lowered its forecast for economic growth in the 15 euro nations to 1.6 percent from 2.1 percent as the fallout from the U.S. housing recession spreads. The region's economy expanded 2.6 percent last year.

A gauge of Italian sales dropped to 43 from 44.7, the biggest monthly decline since the survey began four years ago.

In Germany, Europe's largest economy, the index showed a decline, registering 44.2 after 44.

And yet in France the index rose to 56.2 from 49.1. What this actually means remains to be seen, nonetheless we will keep watching.

French Consumer Confidence January 2008

2008-01-29T10:29:00.001+01:00

Consumer confidence in France dropped to a record low in January as accelerating inflation squeezed purchasing power. A gauge of consumer sentiment fell to minus 34, the lowest since the index was introduced in 1987, from a revised minus 30 in December, Insee, the Paris-based national statistics office, said today.

A gauge of people's personal financial situation slipped to minus 25 from minus 23, the Insee report showed. A sub-index evaluating the outlook for standards of living plunged to minus 44 from minus 32.

A 68 percent increase in oil prices the past 12 months has pushed France's inflation rate to the highest in almost four years. President Nicolas Sarkozy's popularity dropped to the lowest since he took office in May as higher prices deepened concern he'll fail to fulfill his pledge to boost living standards, two opinion polls showed this month.

French consumer prices rose at an annual rate of 2.8 percent in December, up from 2.6 percent in November, Insee said Jan. 15. Crude oil reached a record $100.09 a barrel in New York this month and is now trading about $90.

French Inflation December 2007

2008-01-15T10:25:00.000+01:00

French inflation accelerated to its fastest in almost four years in December, led by surging energy costs. Consumer prices climbed by an annual 2.8 percent, up from 2.6 percent in November, based on European Union-harmonized methods, Insee, the national statistics bureau, reported today in Paris. That's the most since May 2004. Prices rose month on month by 0.4 percent from November.

Consumer-price increases in the euro area are exceeding the European Central Bank's ceiling of just below 2 percent, prompting ECB President Jean-Claude Trichet to signal that policy makers may be slow to start lowering interest rates since they need to contain inflation even as economic growth slows.

The ECB's Governing Council is ``prepared to act preemptively so that second-round effects and risks to price stability do not materialize,'' Trichet said on Jan. 10 after the bank kept its benchmark rate at 4 percent.

While I feel that a lot of this is "sabre rattling" and that an increase in interest rates is very unlikely, I do think that an early reduction in rates - which is what most of the non-inflation indicators are pointing to the need for - is also unlikely.