The French business climate index published by INSEE was stable in November. Its level of 95 is 5 points below its historical average which is by construction at 100. We see on the chart that the index is below 100 since September 2011.
Details of the survey do not show rapid improvement in the coming months. The Industry sector which is a good proxy for GDP short-term dynamics is stable since last August and details on this sector do not suggest a rapid improvement. Orders remain low, lower than their historical average. Companies’ expectations for their own business were lower in November than in October and are now lower than their historical average.
This gloomy environment is not too far from the PMI/Markit survey that was published last Thursday (see here). On the second chart the comparison between the PMI index and the INSEE index (three-month change) shows consistent dynamics. Both have dropped in November.
Looking at the two following charts leads to the following question: What could rapidly improve French GDP momentum?
On the first chart I have compared the INSEE index and GDP annual growth. We see that the two indicators follow the same dynamics and if there is no rapid improvement in the survey we cannot expect stronger growth in the coming quarters.
From the second chart I compare the PMI index and GDP quarterly change. The drop seen in the index in November should lead to a weak GDP number in Q4.
A weak GDP growth number in the fourth quarter will not have a large impact on 2013 GDP growth. This latter will be around 0.15%. But it will have a large impact on 2014 GDP growth as the starting point will be lower than expected. In terms of public finances this can be worrisome.
In other words, we do not see through the INSEE survey a real improvement in the momentum. Looking at flows of New Orders, we see that they are still reduced and will not contribute to a rapid acceleration of the economic activity. What is really problematic is the fact that Export New Orders are also following a weak trend . May be can’t we even expect an improvement in our close trade partners in Europe? As Germany is going well and the United Kingdom also (the CBI survey is very positive for November), this could mean that other European countries are back in a slow motion economy (Italy and Spain ?) or this could mean a real drop in the French competitiveness?
The first or the second explanation could be at the end a trigger to make structural reforms. That would be good news.
Just to conclude, there is an interesting comparison with Germany. The chart below compares the INSEE index and the IFO index. Both indices are in points of standard error, so 0 is the historical average on the period. We see a strong consistency between the two indices and turning points are almost at the same time. The issue in November is that the German index is one standard error above 0 meaning that compared to history German momentum is really strong. In France the index is half a standard error below 0. The momentum is weak and clearly France and Germany do not play the same game. This is a measure of the balance of strength within the Euro Area and could lead to a loss of influence of France. The French German couple which is so important for the European construction is no more balanced on the economic side.
