France Retail PMI April 2008

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

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

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?

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

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

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

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

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

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.