1st February 2013 by The Harried House Hunter
It has been one of the themes of this blog that a country considered to be a bedrock of the Euro project has economic problems of its own to face. Indeed France or La Republique has elements of its economy which are more like the southern troubled Euro area nations than its northern neighbours. This contrasts in the media with the new super-macho France which is having apparent military success in Mali. Mind you plenty of countries have used what the French call “La Gloire” as a distraction from problems at home have they not? Also if you look at the modern terrorist strategic model they drift and fade away when faced with regular military forces on the move and wait for them to have overextended supply lines which can be harassed and picked off much more easily. So this could yet turn out to be an elephant trap for France where she may end up facing the weapons she (and others) supplied to Libya. In such a case the bills both human and economic could be high.
The French Economy
Back in November 2012 when the Moody’s rating agency downgraded France it offered this opinion of her economic circumstances.
France’s long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets
And furthermore that this posed a challenge to her ability to hit what are the main Euro area economic measures of fiscal deficits and national debts.
France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
Today’s news for manufacturing
The issue raised by Moody’s was moved to the forefront of my ming again this morning as I perused the latest update on her manufacturing sector.
Operating conditions in the French manufacturing sector worsened during January. The PMI was dragged lower by all five of its components; output, new orders, employment and stocks of purchases all contracted at accelerated rates
Indeed these numbers confirmed that French manufacturing has opened 2013 in a very poor state as the spot number of 42.9 is considerably below the benchmark of 50 and indicates a severe contraction. This is the sort of number that the economy of Greece has produced. Also there are further worries if we look into the detail of the report.
New orders down at sharpest rate since March 2009
We know what was happening then, and the report posed worries about employment going forwards too.
Faced with spare capacity, manufacturers cut their staffing levels further in January.
So much for the promised “economic convergence”
If we take Kylie’s advice and step back in time we are reminded that the forefathers of the Euro project promised that it would provide economic convergence. Just to be clear they planned that economic performance would converge towards the better economies! However today Germany has also had the same manufacturing numbers as France and take a look at this from Markit who compile them.
The gap between the #PMI manufacturing output indexes for France and Germany is at a record level. Decoupled
The 42.9 of France compares to the 49.8 of Germany for a gap of 6.9. Oh and convergence is already in my financial lexicon! One may also note that even Germany is flat to declining on this measure and the overall Euro area is shrinking at 47.9.
The rise and rise of the Euro exchange rate
This is in many ways one of the mysteries of late 2012 and early 2013 as the Euro appears to have behaved like Clark Kent as it went into a phone-box and emerged as Superman. Even the numbers discussed above have done nothing to halt its progress as it has pushed onto 1.366 versus the US dollar and over 126 versus the Yen. It has also ended the 24/36 hour rally of the pound which is nearing the 1.15s as I type this.
If we look at the trade-weighted exchange rate of the Euro it has risen from 94.4 on the 24th of July last year (the series low) to 102.2 as of yesterday’s calculation. So as we consider an 8% rise in six months we might recall Moody’s point from above.
France’s…. gradual, sustained loss of competitiveness
Not so gradual at that rate of currency appreciation is it? In an era of currency wars we have to face the fact that what politicians call winning is in fact losing for their economies.
Also at a time when the word “markets” has become something of a dirty word it is interesting to note that until last summer the Euro has been falling over its crisis period hopefully giving the weaker nations something of a boost. Well that is over now.
What about the French consumer?
This does not appear too hopeful either if the survey below is any guide.
Falling for a tenth consecutive month, sales contracted at a solid pace during January……The index measuring sales versus one year ago also pointed to a sharp decrease in the latest survey period.
And the consequences of this will echo around the French economy.
Staffing levels at French retailers contracted for a tenth consecutive month in January
The overall picture for France
The original composite survey for France created a bit of a shock just over a week ago with its reading of 42.7 which signalled a sharp contraction overall and in particular was as described below.
its lowest reading since March 2009.
Why isn’t this being caught by the official numbers?
One factor here is that they are way behind in terms of time as for example we have only had the official manufacturing levels for November 2012 so far. However there were signs of a problem there.
and was lower than its last year’s level by 3.6%
Also the latest official Gross Domestic Product numbers show that the French economy has flat-lined since the last quarter of 2011.
In 2012 Q3, French gross domestic product (GDP) in volume terms* rose by 0.1%, after a 0.1% decrease over the previous quarter.
They keep nudging 0.1% off these numbers which gets them nearer to where I thought they should have been in the first place.
The French statistics office Insee calculates a consumer confidence index which as of the January reading is at 86 compared to the average of 100 over 1987 to 2012. Every component is negative, oh, apart from savings expectations and expected unemployment! So a grim future is expected.
On the day when the fourth largest Dutch bank has found itself nationalised I would just like to remind you that France has a large banking sector. Also I am reminded of my theme of yesterday that the world’s banks have seen virtually no reform and remain in a danger zone.
As the band Hard-Fi put it in Living for the Weekend the French economy is under this right now.
Feel the pressure
From the latest data it has decoupled widely from its German neighbour in economic terms and the latest unemployment rate numbers from Eurostat showing a rise to 10.6% in December only reinforce matters. This is up 0.7% on the number a year before.
If we now feed in the planned austerity for 2013 we see that her government’s actions are likely to reinforce a slowdown which is already in place and her exporters are also facing a stronger currency. This mixture moves us onto Britney Spears in musical terms.
You’re Toxic, I’m slippin’ under….
If we move onto the metrics so favoured by the Euro area leaders we see that the French national debt is just shy of the 90% threshold considered significant by Reinhart and Rogoff at 89.9%. We can see scenarios from the data above where France could push significantly above that as a contracting economy leads to a higher fiscal deficit and her government applies yet more austerity.
Also there are other risks as of her 89.9% some 1.7% is lending to other Euro area nations which looks likely to keep rising too.