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Economy in Brief

BoF Survey Shows Weak French Economy Will Anyone Learn from Europe's Fate and France's Choice?
by Robert Brusca  November 9, 2012

Who says it can't get any worse? President Francois Hollande has been met with an economy that has done progressively worse after he took office. While he has clamped an oppressive income tax (75%!) on the rich, he has not been able to make good on his promise of job security: far from it. The OECD is continuing to press France to undertake further reforms. The socialist agenda is taking a turn to the right where Sarkozy once stood was rejected.

Lesson: politics does not trump economic reality. If the French want Fantasyland they should buy a ticket to Euro-Disney, not punch one in the voting booth.

French industry had showed some signs of moving past the weakness in the rest of Europe. French MFG output had oscillated from Sept 2011 through August 2012 without much sign of declining on balance. But, that now looks more like whistling past the graveyard as French industrial output has plunged by 3.2% in Sept compared to its October level. Suddenly, French industrial output is lower by 2.5% year-on-year and French prospects are not looking so good any more. Still, in relative terms, the French Yr/Yr slippage in MFG IP leaves it with the fourth smallest such decline among the nine original EMU members that have reported so far.

The MFG and Services PMI's for France have been slipping for some time. But a for October the level of France's MFG PMI placed in the context of its historic relative strength left it ranked as 9 out of 10 among the original EMU members reporting on that statistic; leaving it better only than Greece. In terms of the simple raw level of the PMI France ranked 8th, better than Greece and Spain. But it is still below Italy on that measure.

While fewer EMU nations report a services sector PMI reading monthly, among the five members that offer results France ranks as the fifth worst on a relative gauge for its services sector. Its raw reading for services is higher than that for Spain but once we adjust them for relative strength France emerges as worse than Spain.

None of this should be too shocking as Germany is also showing considerable economic degradation and it is by far the strongest European economy. Germany's economic surveys do not look as bad in many cases because the outlook portion of the German results is much weaker than the current readings which have held up much better so far. But with the German trade situation weakening the main driver of the German economy is slowing steadily and the surveys already show that forward-looking assessments are being cut sharply there.

Today we have the topical survey from the Bank of France. After viewing its own survey the BoF noted that France might be headed for a recession.

This survey has two of its main components plotted in the chart and its main survey results memorialized in the table. Direct your attention to the far right column that processes the raw readings in column one (for October 2012) to put them in the context of the historic tendency for each category. For example, the overall order book reading of -8.06 looks very weak compared to the -1.21 production outlook reading. It looks to be nearly seven times worse! But if we instead evaluate each of these categories by placing the current reading in a queue of ordered observations form its own history, we find that the -1.21 reading is actually much weaker in its historic queue that is the -8.06 reading in its historic queue (Yes! -1.21 is less than -8.06 because one refers to 'apples' and the other 'oranges'). That result is hinted at by the fact that the production outlook average is +6 while the order books average is +3. The ranking metric actually takes all the historic observations into account when positioning this month's value in its queue. When that is done a better, objective assessment is obtained and a clearer picture of French industry emerges since once homogenized you can compare one category to the next to see what is really weak and weakest.

What emerges from these queue rankings is how very weak the French survey is across the board-and you can read it directly from the table without needing an historic chart... The overall sentiment index is in the bottom 13th percentile of tis queue. Current production runs in the bottom 8.1% while the outlook isn't much better in the 11.6th percentile. Demand is less dramatic but still quite weak bottom 28th percentile but foreign orders are a weaker, bottom 11.9 percentile... and so on.

At the bottom of the table we can see that the employment readings are relatively sanguine. But they are usually lagging observations and don't really tell us anything about where the French economy is headed. If anything they show the gap between what labor thinks is happening and what is coming its way.

On balance France is taking a shellacking. And, political promises to the contrary, it has been sucked into the vortex of weakness that began by gripping the weakest EMU economies. And now that more help appears to be needed by the weakest and as Spain flaunts its fate as escapable, the relatively healthier larger economies are being dragged down too. That will make them even more reluctant to deploy their increasingly scarce resources to bail out their needy neighbors.

Lessons from the Black Hole that Europe has become What we see in the Zone is an economic block paying the price for its procrastination. One can only hope that the politicians in the US observing these trends decide to try to avoid them instead of emulate them.

Some of the early responses from the US politicians are favorable while others reflect the same pre-election obstinacy that had poisoned the previous two years. The elections in the US were close enough in the popular vote to make a poor case for anyone to claim that they have a mandate. The electorate did not put the various branches of government in any one hand. While the extreme Tea Party saw its influence cut, the majority of its members are back in the saddle. What does that mean?

While the full message of the US election is still difficult to puzzle out (unless you just want to take a winner take view), the situation in Europe offers a clear of example of what the US should strive to avoid. France is an example of a nation that tossed out one leader thinking that the other guy could swim upstream against the current and avoid the coming pain from the Eurozone. Now France has as a leader one whose vision was that he could avoid the unavoidable instead he must face the facts. They threw out the guy that wanted to face the facts. And it is not surprising that with that tact he is losing the nation's confidence. Denial is a poor strategy.

The bottom line is that you can't use politics to avoid the economic facts of life (although Greece is trying hard to make wrong on this). We know that politicians often skirt economic constraints but what happens in that case is that the costs of flaunting solid policy mount up and at some point they come to dominate the scene. When that happens they take policy leverage out of the hands of the leadership.

France has started to reach that tipping point. Greece has gone over the edge and trying to claw back leverage by threatening other EMU members with the repercussions of a Greek exit. Spain is in denial. The US still has room for maneuver, but a wrong turn could put it on that slippery slope where policy loses the ability to influence events. And the US has put at its helm the guy who four years ago said he was the one to make the economy better. Let's hope he has learned something over the past four years.

Bank of France Monthly INDUSTRY Survey: SUMMARY
Oct-12 Sep-12 Aug-12 12-mo
Oct-88 Avg.
Percentile of
ranked values
Production Latest Month
Total Industry -4.05 -1.72 4.13 0 6 8.1%
Production Outlook
Total Industry -1.21 -2.8 -2.95 0 6 11.6%
Overall Orderbooks -8.06 -9.37 -7.27 -2 3 28.1%
Foreign Orders -3.63 -4.7 2.36 0 7 11.9%
New Orders; Change
Total Industry -6.79 -4.14 7.62 -1 7 8.1%
Stocks; Finished Goods
Total Industry -2.22 -1.83 -1.74 -2 -2 40.7%
Capacity Utilization 76.2 76.16 76.6 78 79 7.4%
Latest Month -1.65 -3.22 -0.88 -1 0 51.6%
Outlook -2.77 -3.2 -4.67 -2 0 74.0%
Industry Sentiment
91.94 92.16 93.12 94 99 13.0%
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