France steps onto the austerity path

As Greece strikes and Spain once again questions what a bailout will actually bring as the EC busts it’s economic forecasts , we have yet another round of  PMI data out of Eurozone showing a familiar trend.

From Senior Economist at Markit Economics:

The final Eurozone PMI reading came in at a level historically consistent with the region’s economy contracting at a quarterly rate of around 0.5%, confirming the picture painted by the earlier flash estimate. Sentiment is still being hit hard as companies worry about the dual impact of weak domestic demand and a slowing global economy. This is likely to hit growth in the coming months, especially at a time when cost-caution at manufacturers and service providers is filtering through to the wider economy through rising job losses, reduced purchasing and inventory depletion.

The downturn is still widespread, with all of the big- four economies seeing output decline in October. Signs that the contraction in Germany gathered pace are particularly disappointing, given the important role a strong performing Germany could play in stimulating growth elsewhere in the currency zone. Ireland was the only real brighter spot in October, with growth improving as it continues to make up lost ground.

So nothing new here. The failing periphery economies are slowly dragging down the core via the trade-able sector and renewed austerity pushes from the failing outcomes will only make this worse through 2013.

In the last week there has been quite a bit of news circculating about the weakness of France and its need for structural reforms to stay competitive. I’ve spoken previously about France and how, although it is recognised as a ‘core’ EZ country, it is far more like the periphery in economic structure:

High levels of public and private debt, a long running negative trade balance and current account deficit, stalling industrial production, GDP and employment along with significant banking sector exposure to the periphery all add up to a fairly risky predicament. This is certainly not a country that could take on a strict austerity regime without causing itself some significant short-to-medium term economic damage because it is obvious from the metrics that the private sector has been borrowing from both the external and government sectors for a long period of time.

Overnight the French government enacted some changes to business taxes worth €20bn, offset by consumer tax rises and public sector cuts, supposedly to start down the path to economic restructuring:

The French government announced on Tuesday it is to create 20 billion euros worth of tax breaks for businesses as one of a series of budgetary measures aimed at boosting the country’s flagging competitiveness.

France’s Socialist government unveiled Tuesday measures to bolster the struggling industrial sector and make exporters more competitive but the package fell short of the shock therapy industry leaders are urging.

Prime Minister Jean-Marc Ayrault proposed new incentives for investment in innovation, small businesses and training, and tax credits for companies keeping jobs in France as a way of easing costs in the current downturn.

Unveiling the measures, Ayrault said the government was adopting almost all of the “shock” measures recommended in a report drawn up by Louis Gallois, one of the country’s most prominent industrialists.

“The situation of the country calls for ambitious and courageous decisions,” Ayrault said. “France needs a new model.”

The package, however, fell short of recommendations in a recent government commissioned report that payroll taxes should be cut at the expense of consumer taxes in order to remove a competitive disadvantage for export-focused local businesses. The Hollande government appears to be wary of moving too fast because it is quite obvious that recent consumer tax changes are already having negative flow-on effects to the local economy. From the French Services PMI:

Business activity in the French service sector decreased at a substantial rate in October. This primarily reflected a further drop in incoming new business, as weak economic conditions weighed on demand. The rate of job losses accelerated as service providers responded to excess capacity. Output prices continued to be cut at a sharp rate, despite a further (albeit weaker) rise in input costs. Future expectations deteriorated again, slipping to the lowest level since January 2009.

France is definitely a country to keep an eye on over 2013 as it attempts to slow internal consumption and boost exports, obviously not an easy task given the current economic structure and the fact that many of their export partners are attempting the same and they share the same currency.

To the PMIs:

Eurozone composite PMI

Eurozone downturn deepens at start of Q4 2012, as output continues to contract across the big-four economies

  • Final Eurozone Composite Output Index: 45.7 (Flash 45.8, September 46.1)
  • Final Eurozone Services Business Activity Index: 46.0 (Flash 46.2, September 46.1)

The downturn in the Eurozone economy deepened at the start of Q4 2012, with the combined output of the manufacturing and service sectors falling at the fastest pace since June 2009. The Markit Eurozone PMI composite output index fell to 45.7 in October, down from 46.1 in September and 55 the earlier flash estimate of 45.8. Overall activity 50 has now fallen for nine straight months.

Faster rates of contraction were signalled in both the manufacturing and service sectors during October. Manufacturing production declined for the eighth month running, as companies experienced reduced inflows of new orders from domestic clients and lower intra- and extra-Eurozone trade. Service sector activity meanwhile fell at the sharpest pace since July 2009.

The downturn was widespread, with output falling at both manufacturers and service providers in all of the big-four economies. The only positive performance was recorded by Ireland, where faster rates of expansion in manufacturing and services took combined growth to a 20-month peak.

Steep contractions were signalled for Spain, France and Italy in October, although the rates of decline eased slightly in each of these nations compared with one month earlier. The downturn in Germany was less severe overall, but nonetheless faster than that seen in September.

Not a pretty picture heading into the new year. National reports below.


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  1. At least France is having a crack at it trying to boost exports. All that we see is old mac bank jumping back on the mortgage train… Go Australia!

    • Jumping jack flash


      I was just thinking as I read it “This sounds like Australia” – except we have low public debt.

      In Ostraylya maate, we must wait for things to get really, really bad before we think about doing the least amount of work possible to make a band-aid to fix it with.

  2. The GDP and PMI’s look very close to the point that they were at last time when they fell off the edge of a cliff. In fact the GDP seems to be holding it all up, but that GDP is most likely made up of profits derived from mostly large layoff’s and other restructurings that have resulted in down sizing, inventory reductions, projects cancelled or put on hold, end result is the false appearance of more cash that share holders like to see. But this starts to fail as the option’s companies have start to run out.

    Next round should be a lot worse. Greece will set in motion what we all know is coming and even the small recovering in the US (which I don’t believe as there is a lot of temp hiring before the Christmas rush and then a lot of layoff’s after it + two storms to deal with) will not hold everything up.

  3. I assume the table of All Nations ranked by all-sector output growth” is a diffusion index which shows that Ireland is expecting positive growth domestic output, while the other nations shown are expecting falls, just not at as fast a rate as previously.