The French survey published this morning by INSEE shows a drop in economic activity in August. The index level is now 91 (with an historical average at 100 and a standard error at 10). It is the same level than in August 2013.
These figures can be consistent with a small GDP contraction in the third quarter. As European surveys appeared weaker in August, it is not possible to expect an short term positive impulse coming from French main trading partners. The French economy must be boost from inside to gain some autonomy in its growth process.
The new economy minister, Emmanuel Macron, have a huge task in front of him.
The first graph shows the business climate index and its components. The average of each of them is 100 and we see that there are all below this threshold. In July and August the gap with this historical average is wider except for services.
The index on industry is trending downward since the end of the first quarter. This is consistent with the drop of this sector index in the PMI/Markit survey. Construction and distribution are weak also. All these components are witnessing low flows of orders. There is a lack of impulse. That’s clearly what characterize the French economy: no source of impulse. Some sectors are more robust like services but their momentum is not strong enough to change the French economic profile.
The second graph presents the consistency between the business climate index and the GDP annual growth rate.
The two indicators have consistent profiles. The decline seen in the third quarter for business climate index could be reflected by a small contraction in Q3 GDP growth. Annual GDP growth could converge to 0. The climate index is on average well below the average seen in the first and the second quarters. There is a lack of support for economic growth. For the whole year, GDP growth could be in the range 0.3-0.4% instead of the 0.5% expected by the French government.
This support will not come from outside. The Markit survey for august was weak and the IFO index dropped for the fourth month in a row. If the impulse doesn’t come from outside, it means that the adjustment will have to come from inside. That will be the the task of the new economy minister.
