France Gravitates Towards Economic Decline

France's Economy

According to July’s flash PMI data, which signaled further erosion of growth velocity, France is heading towards economic decline at the start of the third quarter of 2022.

A significant drag on the economy was weakening demand conditions, and data depicted the first decline in the private sector in February 2021. This propelled companies to address their backlogs, that and fallen in July.

On the price front, there was a fractional leap in output price inflation rate in July, albeit more subtle compared to May’s record. While input prices rose to the slowest extent in five months. The Flash France PMI Composite Output Index fell for the third time in three months. At the sector level, there were notable differences as consistent reductions in manufacturing output contrasted with a further uptick in services activity. Goods production also fell at the sharpest rate ever since the first phase of COVID-19 lockdown restrictions in May 2020, and services firms pointed to the weakest increase in business activity since April 2021. According to the firms in good products and services sectors, weaker demand was a key factor behind the reduced output. Since February 2021, new business intakes at French private sector companies were reduced for the first time. The dip was caused by higher prices, the decline in demand, client hesitancy, and others. Despite all these, survey data has highlighted the sustained growth in employment in the French Private sector.

The rate of job creation, though above the long-run average, slowed to a six-month low. While services companies continued their hiring activities, manufacturing staffing numbers remained unchanged since June. This trend in new orders also enabled businesses to tackle their outstanding work levels in July, causing backlogs of work to decline for the first time in about one and a half years. Furthermore, cost pressures eased as inflation slowed down for the fifth month in a row. There continued to be a considerable divergence between the confidence level in manufacturers and service providers, but considering worries about inflation and Ukraine war, it weighs more on manufacturers.

Joe Hayes, Senior Economist at S&P Global Market Intelligence, commented on the flash PMI data and said: “July ‘flash’ PMI data raises further concerns that the French economy is heading towards a recession as data signaled worsening trends across a number of key indicators. The level of output was up only marginally from June and solely reflected activity growth at services firms. The manufacturing sector is already in a steep downturn, with production levels falling at the fastest rate since the initial phase of the COVID-19 pandemic in the first half of 2020”.

He further said that “The growth trend in the service sector meanwhile worsened further, and momentum is clearly to the downside here. Demand is being adversely impacted by the intense inflationary environment, with clients reluctant to place orders at these elevated prices. Consequently, new business fell for the first time since February 2021.”

He concluded that “It’s difficult to imagine the near-term trend improving when anecdotal evidence from panelists continues to portray a picture of worsening health for demand. This is especially the case for the services economy, which is rapidly losing support from the post-pandemic recovery in consumer spending.”

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