France: manufacturing activity deteriorated again in December

22, Jan - NEWS

French manufacturing activity continued to deteriorate in December, hit by a "strong contraction" in production and new orders, according to a PMI index released by S&P Global and Hamburg Commercial Bank (HCBO).

The indicator fell from 42.9 in November to 42.1 in December, remaining well below the threshold of 50 that delineates areas of contraction and expansion in activity. According to S&P, this is the "sharpest deterioration in business conditions" in the sector since May 2020.

"French manufacturing is caught in a downward spiral. Tightening financial conditions and rising prices have put pressure on demand, leading to a fall in new orders, production and employment," commented Norman Libke, an economist at HCBO, in a press release.

S&P, which surveyed about 400 manufacturing companies between Dec. 6 and Dec. 15, 2023, notes that activity was particularly affected in the intermediate and capital goods sectors, while the consumer goods sector was hit harder.

In explaining the drop in new orders, 39% of companies surveyed cited a decline in demand, particularly due to the worsening economic climate in the construction, automotive and aerospace sectors. Foreign competition was also mentioned.

As a result, companies are reducing headcount for the seventh consecutive month.

As for selling prices, they declined in December due to lower production costs amid falling raw material prices.

For the next twelve months, the surveyed manufacturers remain pessimistic about the next twelve months, with 32% expecting a decline in production levels.

"The survey points to a gloomy business outlook for 2024, with companies' pessimism attributed to the risk of an economic downturn and a prolonged drop in demand," Mr. Libke emphasized.

Here are some specific factors that could contribute to a further deterioration of the economic situation in France:

•  Monetary tightening by the European Central Bank (ECB). The ECB is preparing to raise interest rates in response to rising inflation, which could lead to further higher borrowing costs and weaker demand.
•  Continued deterioration of the geopolitical situation. The war in Ukraine and related sanctions are negatively impacting the global economy and leading to increased uncertainty.
•  Deteriorating terms of trade. Rising energy and other commodity prices are reducing the competitiveness of French manufacturers in foreign markets.

If these factors continue, the French economy could face serious problems in 2024.