Thursday, September 20, 2012

France's economic conditions dim; Eurozone core growth in trouble

We are seeing further evidence of the Eurozone-wide recession that is more entrenched than numerous economists have been projecting. The slowdown in Germany (discussed here) demonstrates that the core states are not immune. Today's MarkIt flash PMI numbers, particularly from France also show ongoing economic weakness. French composite PMI hit a new post-09 low, and as the chart below shows, the GDP (which is reported on a lag) is sure to follow.

France PMI (Source: MarkIt Partners)
MarkIt: - September, falling at the steepest rate in nearly three-and-a-half years. All the more concerning was the fact that new business and employment also showed accelerated declines, while service providers’ future expectations slipped into negativity for the first time since early 2009. GDP may have stagnated for three successive quarters up to Q2, but yet more weak PMI data points firmly towards a contraction in Q3.
Employment PMI out of France is pointing to weakening labor markets across the board (both manufacturing and services).

France PMI (Source: MarkIt Partners)

One of the major issues for France (and the nation's manufacturing sector in particular) has been poor labor competitiveness. The recent closure of a Peugeot plant exemplifies this problem. And more factory closures are on the way.
The Economist: -  The decision by Peugeot-PSA, a loss-making carmaker, to shut its factory at Aulnay, the first closure of a French car plant for 20 years, and to shed 8,000 jobs across the country has rocked France. It has become an emblem both of the country’s competitiveness problem and of the new Socialist government’s relative powerlessness, despite its promises, to stop private-sector restructuring.
Over the past 12 years, a competitiveness gap has opened up between France and Germany, its biggest trading partner. This shows both in manufacturing unit-labour costs, which have risen by 28% in France since 2000, but only 8% in Germany, and in France’s declining share of extra-EU exports. A cross-border study of two chemicals firms by Henri Lagarde, a French businessman, points to part of the problem: the German company pays only 17% of its employees’ gross salaries in social charges, next to 38% for its French counterpart. A recent study of competitiveness ranked Germany in sixth place; France came 21st.
Hollande is beginning to talk about a taboo subject for France's left-leaning politicians - labor reforms. But given the difficulties involved in implementing such reforms, especially in France (reforms may make it easier for companies to lay off workers - a difficult subject in France), it may be years before competitiveness improves and manufacturing returns. In the mean time with the Socialists in power, there are few other government initiatives on the horizon that may help the nation's output growth. Anti-financial-services regulation, numerous austerity measure, and tax increases (75% top tax rate) - all point to further weakening of economic conditions. And since France is 21% of the Eurozone's GDP, this does not bode well for the area's economic recovery.
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