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France: Digging Deeper (powered by Bank of America) |
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21.11.08 14:16 |
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France: Digging Deeper
All incoming data suggest that the "miraculous" 0.1% GDP growth in 3Q was only a respite for France. The French case may not fit (for the moment) the technical definition of a recession (two consecutive quarters of negative GDP growth), but the fall of consumer spending in October, in contrast with the small gain in 3Q, and the further steep fall in the PMI indices for November confirm that the French economy clearly is in "recessionary territory". We expect GDP to fall by 0.4% qoq in 4Q 2008 and do not see any positive reading before 3Q 2009.
Consumer spending on manufactured goods fell by 0.4% in October after an unexpected rebound in September, slightly revised down from an initial +0.6% to +0.5%. In September, a surge in the usually widely gyrating purchases of clothes had saved the day, but excluding textiles consumer spending was flat. In October, almost all the subcomponents fell into negative territory. Spending only rose in consumer electronics and household appliances. The latter component will likely struggle in the months ahead, now that it is getting increasingly clear that the French housing market has entered a steep downward correction.
The 0.2% qoq gain in consumer spending in 3Q after a stagnation in 2Q could be interpreted as a brief ray of light between two dark clouds. Oil prices started to recede after their peak in mid-July, liberating some purchasing power, and consumers may have failed to identify, in the summer, the full extent of a deterioration of the labour market which is only starting. Unemployment rose by 49,000 in August and September. Judging by the incoming survey data, much more is to come. The French households' savings ratio is usually extremely sensitive to changes in employment prospects. It stood at 15.8% in 2Q 2008 (last available data). During the latest economic downturn, it shot up to a maximum of 17.7% in 4Q 2002 (unemployment at the time had risen by 5.8% yoy). An increase in precautionary savings will probably offset any further impact of the continuing correction in oil prices on disposable income in the coming quarters.
Indeed, the deterioration in hiring intentions was one of the striking features of today's PMI indices for November. In the manufacturing sector, the employment component fell to 40.6, the lowest level in the survey history, down from 44.4 in October. In the services, hiring intentions rebounded slightly in November, to 49.2 from 48.8 in October, but they have remained below the stagnation line for six months.
In both sectors, the headline PMI in November hit its lowest level since the creation of the series 10 years ago. This confirms that the current situation is much worse than the mini-downturn of 2001. The further fall in the PMI indices in November also suggests that the sharp decline in survey data in October was not just a knee-jerk and possibly exaggerated reaction to the financial turmoil (the October surveys were made before the bailout plans for the banking systems were announced). French businesses, just like all their European counterparts, are now clearly settled in recession mode.
The French government was right not to boast too much about the "escape from recession" in 3Q. It preserved its credibility by warning the public against bad times ahead. The French household sector is one of the least sensitive to monetary stimulation, since the overwhelming majority of mortgages are granted on a fixed-rate basis for their full duration and credit accounts for a very small share of consumer spending. The current monetary relaxation, which anyway will take an even longer than usual time to have an impact on the real economy due to the credit market seizure, will therefore provide only a limited help to France in 2009. Some fiscal stimulation would therefore be welcome in France, but this country has a very limited room for manoeuvre on public finances. A serious recession now looks unavoidable.
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