Wednesday, May 29, 2013

The gap between France's "hard" and "soft" economic indicators poses risks

France continues to pose the biggest near-term risk to the euro area's economic recovery. Why France some may ask? After all it was Italy and Spain who presented the biggest challenge to the union's stability in 2011 and 2012. The situation in those two nations is dire indeed. However the so-called "hard" economic measures in Italy and Spain have generally "caught up" with the "soft" indicators (surveys). For example the Italian GDP growth is now roughly in sync with the service PMI measure (below).

Source: Markit

Spain's hard indicators may have even "overshot" the "soft" ones to the downside. Spain's and Italy's recession is effectively "priced in" - i.e. reflected in the hard measures such as the GDP or the industrial production. Furthermore, there are signs of the periphery nations' contraction bottoming out (see discussion). France however is a different story. The nation still shows a relatively small GDP contraction, while survey indicators look horrible (chart below).

That gap creates a risk that France is yet to undergo its deep "official" recession, which would hold back the Eurozone as a whole. And France's "soft" measures of output continue to lag the rest of the Eurozone (see discussion). What's particularly troubling is that France's "soft" economic indicators show a broad deterioration - in both business as well as consumer sentiment.

Business sentiment:

Consumer sentiment (record low for France):

Given that France is over a fifth of the area's GDP output (see chart below), there is a clear risk that if the nation's "hard" indicators catch up with the "soft" ones, the Eurozone's recovery may take considerably longer.
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