French business expansion slows amid sluggish eurozone

Reduced growth of new businesses is explained "in particular by a further decline in demand in the manufacturing sector, but offset by a further increase in new contracts in the service sector," according to the economists. [Klingspor/Flickr]

France’s private sector is growing at a slower rate and has reached the lowest level in the past four months, according to forecasts published by IHS Markit on Monday (23 September). For the eurozone, business expansion sank to the lowest level since June 2013. EURACTIV’s partner La Tribune reports.

According to the latest figures released by global information provider IHS Markit on Monday (23 September), the composite Purchasing Manager’s Index (PMI) for France dropped from 52.9 in August to 51.3 in September, its lowest level in four months.

When the MIP is above 50 points, this means that private sector activity is expanding. If it is below the 50-point-threshold, it means that business is decreasing.

According to economist Eliot Kerr, “France’s economic growth has been driven by the service sector. The performance gaps between the latter and the manufacturing sector remained unchanged, with service providers continuing to report an increase in their activity while manufacturing output started to decline again in September.”

The Bank of France forecast a sluggish growth for the French economy, as it predicted a 1.3% growth rate for 2019 and 2020, compared to 1.7% in 2018 and 2.4% in 2017.

Despite the deterioration in the global economy, “the French economy is fairly resilient to the downturn,” said BNP Paribas economist Hélène Baudchon.

“The stability of France’s growth can be explained by the essentially stable domestic demand, excluding stocks. Quarter after quarter, we observe a positive contribution of 0.5 points from domestic demand,” Baudchon added.

Industrial production is suffering

According to Markit statistics, the index measuring manufacturing production fell to a two-month low of 49.7 in September compared to 50.7 in August.

When it comes to services, the results are not favourable either. The tertiary flash index fell to 51.6 compared to 53.4 in August, a four-month low.

Reduced growth of new businesses is explained “in particular by a further decline in demand in the manufacturing sector, but offset by a further increase in new contracts in the service sector,” according to the economists.

The hardships for France’s engine for the industry are starting to “spread, with the service sector posting its weakest expansion since last May in September”.

A worrying trend across the eurozone

The economic outlook for eurozone countries is seriously deteriorating.

According to the latest figures provided by the European Central Bank last week, GDP growth in the euro area is expected to slow from 1.9% in 2018 to 1.1% in 2019, before recovering slightly in 2020. Central bankers have lowered their forecasts for 2019 and 2020 compared to their June predictions.

IHS Markit’s economists noted that “the region’s economic expansion has been held back by the sharpest decline in demand for goods and services in over six years.”

The shrinking of the manufacturing sector – which is mainly the result of the sharpest decline in output since 2012 – has been accompanied by weak growth in the services sector.

Recession fears grow as euro area inflation hits three-year low

Inflation in the euro area fell to 1% in July, its lowest level since 2016, according to Eurostat data released on Monday (19 August), adding pressure on the European Central Bank to consider relaunching its economic stimulus program in September.

For Chris Williamson, chief economist at IHS Markit, the situation could quickly worsen.

“If the manufacturing sector, which is currently in its most severe recession since 2012, continues to weaken, there will also be concern about the spread of this unease to the rest of the economy. Growth in the services sector has slowed, with one of the lowest levels since 2014,” Williamson said.

The companies interviewed “always express concern about trade wars and geopolitical tensions, including Brexit,” he explained in a press release.

ECB President Mario Draghi, whose term is due to end in a few weeks, addressed the issue in his farewell speech to the European Parliament on Monday (23 September).

“Recent data and forward-looking indicators – such as new export orders in manufacturing – do not show convincing signs of a rebound in growth in the near future and the balance of risks to the growth outlook remain tilted to the downside,” Draghi told the Parliament’s Committee on Economic and Monetary Affairs.

“The longer the weakness in manufacturing persists, the greater the risks that other sectors of the economy will be affected by the slowdown,” Draghi added.

Draghi calls for euro budget in farewell to MEPs

ECB President Mario Draghi urged EU co-legislators on Monday (23 September) to set up a fiscal capacity to counter eurozone’s economic shocks, as he warned of the worsening economic outlook in his farewell debate with MEPs.

The stagnation of the Italian economy

According to the latest figures released by the Istat Institute on Monday(23 September), Italy’s 0.8% GDP for 2018 was even lower, compared to the previously estimated 0.9%.

For 2019, the European Commission and the International Monetary Fund (IMF) expect Italy’s economic growth to be 0.1%. But some experts are even more pessimistic, believing that the eurozone’s third-largest economy could fall into recession again.

Germany fragile

IHS Markit’s latest figures indicate “the first decline in global activity since April 2013 and the highest rate of contraction since October 2012. These trends reflect a slowdown in the growth of service activity to its lowest level in the current year and the second-largest decline in manufacturing output since June 2009.”

These difficulties can be explained by the fact that the German economic model is increasingly exposed to the ups and downs of international trade, and because its GDP is so dependent on trade.

In Berlin, debates on the need for fiscal stimulus are being revived by fears of a recession. During a recent presentation of the book “The World Economy in 2020” at France’s leading research institute for international economics, CEPII, the Chief Economist at Crédit Agricole, Isabelle Job, gave an update on the matter.

“Trade war, Brexit, uncertainty, nothing has changed in the last year. Central banks have developed an aversion to cycles. The European economy is slowing down because of the trade war, uncertainty. But what can the central bank do? It cannot play with these two factors. […] Shouldn’t the central banks’ mandate be re-balanced to ensure more financial stability? Accommodating monetary policies are a blessing for markets. This leads to more risk,” she said.

[Edited by Zoran Radosavljevic]

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