Is France using a war as a distraction from her weakening economy?

It has been one of the themes of this blog that a country considered to be a bedrock of the Euro project has economic problems of its own to face. Indeed  France or La Republique has elements of its economy which are more like the southern troubled Euro area nations than its northern neighbours. This contrasts in the media with the new super-macho France which is having apparent military success in Mali. Mind you plenty of countries have used what the French call “La Gloire” as a distraction from problems at home have they not? Also if you look at the modern terrorist strategic model they drift and fade away when faced with regular military forces on the move and wait for them to have overextended supply lines which can be harassed and picked off much more easily. So this could yet turn out to be an elephant trap for France where she may end up facing the weapons she (and others) supplied to Libya. In such a case the bills both human and economic could be high.

The French Economy

Back in November 2012 when the  Moody’s  rating agency downgraded France it offered this opinion of her economic circumstances.

France’s long-term economic growth outlook is  negatively affected by multiple structural challenges, including  its gradual, sustained loss of competitiveness and the long-standing  rigidities of its labour, goods and service markets

And furthermore that this posed a challenge to her ability to hit what are the main Euro area economic measures of fiscal deficits and national debts.

 France’s fiscal outlook is uncertain as a result of its  deteriorating economic prospects, both in the short term due to  subdued domestic and external demand, and in the longer term due  to the structural rigidities noted above.

Today’s news for manufacturing

The issue raised by Moody’s was moved to the forefront of my ming again this morning as I perused the latest update on her manufacturing sector.

Operating conditions in the French manufacturing sector worsened during January. The PMI was dragged lower by all five of its components; output, new orders, employment and stocks of purchases all contracted at accelerated rates

Indeed these numbers confirmed that French manufacturing has opened 2013 in a very poor state as the spot number of 42.9 is considerably below the benchmark of 50 and indicates a severe contraction. This is the sort of number that the economy of Greece has produced. Also there are further worries if we look into the detail of the report.

New orders down at sharpest rate since March 2009

We know what was happening then, and the report posed worries about employment going forwards too.

Faced with spare capacity, manufacturers cut their staffing levels further in January.

So much for the promised “economic convergence”

If we take Kylie’s advice and step back in time we are reminded that the forefathers of the Euro project promised that it would provide economic convergence. Just to be clear they planned that economic performance would converge towards the better economies! However today Germany has also had the same manufacturing numbers as France and take a look at this from Markit who compile them.

The gap between the #PMI manufacturing output indexes for France and Germany is at a record level. Decoupled

The 42.9 of France compares to the 49.8 of Germany for a gap of 6.9. Oh and convergence is already in my financial lexicon! One may also note that even Germany is flat to declining on this measure and the overall Euro area is shrinking at 47.9.

The rise and rise of the Euro exchange rate

This is in many ways one of the mysteries of late 2012 and early 2013 as the Euro appears to have behaved like Clark Kent as it went into a phone-box and emerged as Superman. Even the numbers discussed above have done nothing to halt its progress as it has pushed onto 1.366 versus the US dollar and over 126 versus the Yen. It has also ended the 24/36 hour rally of the pound which is nearing the 1.15s as I type this.

If we look at the trade-weighted exchange rate of the Euro it has risen from 94.4 on the 24th of July last year (the series low) to 102.2 as of yesterday’s calculation. So as we consider an 8% rise in six months we might recall Moody’s point from above.

France’s…. gradual, sustained loss of competitiveness

Not so gradual at that rate of currency appreciation is it? In an era of currency wars we have to face the fact that what politicians call winning is in fact losing for their economies.

Also at a time when the word “markets” has become something of a dirty word it is interesting to note that until last summer the Euro has been falling over its crisis period hopefully giving the weaker nations something of a boost. Well that is over now.

What about the French consumer?

This does not appear too hopeful either if the survey below is any guide.

Falling for a tenth consecutive month, sales contracted at a solid pace during January……The index measuring sales versus one year ago also pointed to a sharp decrease in the latest survey period.

And the consequences of this will echo around the French economy.

Staffing levels at French retailers contracted for a tenth consecutive month in January

The overall picture for France

The original composite survey for France created a bit of a shock just over a week ago with its reading of 42.7 which signalled a sharp contraction overall and in particular was as described below.

its lowest reading since March 2009.

Why isn’t this being caught by the official numbers?

One factor here is that they are way behind in terms of time as for example we have only had the official manufacturing levels for November 2012 so far. However there were signs of a problem there.

and was lower than its last year’s level by 3.6%

Also the latest official Gross Domestic Product numbers show that the French economy  has flat-lined since the last quarter of 2011.

In 2012 Q3, French gross domestic product (GDP) in volume terms* rose by 0.1%, after a 0.1% decrease over the previous quarter.

They keep nudging 0.1% off these numbers which gets them nearer to where I thought they should have been in the first place.

The French statistics office Insee calculates a consumer confidence index which as of the January reading is at 86 compared to the average of 100 over 1987 to 2012. Every component is negative, oh, apart from savings expectations and expected unemployment! So a grim future is expected.

French Banks

On the day when the fourth largest Dutch bank has found itself nationalised I would just like to remind you that France has a large banking sector. Also I am reminded of my theme of yesterday that the world’s banks have seen virtually no reform and remain in a danger zone.

Comment

As the band Hard-Fi put it in Living for the Weekend the French economy is under this right now.

Pressure,pressure,pressure,pressure,pressure

Feel the pressure

From the latest data it has decoupled widely from its German neighbour in economic terms and the latest unemployment rate numbers from Eurostat showing a rise to 10.6% in December only reinforce matters. This is up 0.7% on the number a year before.

If we now feed in the planned austerity for 2013 we see that her government’s actions are likely to reinforce a slowdown which is already in place and her exporters are also facing a stronger currency. This mixture moves us onto Britney Spears in musical terms.

You’re Toxic, I’m slippin’ under….

It’s dangerous

I’m fallin’

If we move onto the metrics so favoured by the Euro area leaders we see that the French national debt is just shy of the 90% threshold considered significant by Reinhart and Rogoff at 89.9%. We can see scenarios from the data above where France could push significantly above that as a contracting economy leads to a higher fiscal deficit and her government applies yet more austerity.

Also there are other risks as of her 89.9% some 1.7% is lending to other Euro area nations  which looks likely to keep rising too.

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  • Anonymous

    Just how much credence should be placed in Reinhart & Rogoff’s thesis?

  • Pavlaki

    Shaun, I am curious to know (from your previous experience in trading) what drives currency markets (other than fundamentals – which appear to be totally ignored these days) and in particular the Europhoria? I have watched this week as there has been a steady drip of bad economic news from Europe and reasonably good news from the UK and yet the Euro has shot up against the pound. I am absolutely mystified as to what is driving it so fast! A small drift up to 1.20 might have been expected but not such a fast rise. I export ( or did until the recent Euro rise ) on a very small scale from Greece Portugal and Spain to the UK and so follow EU/£ quite closely. I just cannot explain to myself what is going on at the moment! The financial markets and the real economy appear to exist in different Europes.

    On a separate topic – my contact in Spain reckons that the payment scandal with the PP could blow the government out of office! It’s not getting much coverage in the UK but could be very big news indeed.

  • Justathought

    Shaun,

    A very good blog indeed, leaving just a throwing stone from France,
    not only we are informed of the French situation but we have the feel of it by
    the numerous French people shopping in Belgium.

    The French intervention in Mali is in fact to protect the
    uranium mining facilities of Niger; France is in completed dependency form its supply.
    Some 70% of the electricity produce is of nuclear based industries.

    Some days ago … France’s Labour Minister has sent shivers
    down the spines of his compatriots after announcing that the country is a
    bankrupt state – in a radio interview on Sunday. Michel Sapin later rebutted
    the comment.

    Would it be a premise of structural reforms in the making or
    some future austerity measures to be imposed by the French government? Let’s
    wait and see.

    Regards,

    Addendum

    French citizens seem to side with Sapin’s original statement as a recent poll in Le Figaro showed that 80 percent of readers agreed with his assessment. The public’s outrage at the current state of the French economy is unsurprising given that the unemployment rate sits at 10.3 percent, the highest it’s been in 15 years. “Not a week passes when there isn’t a massive firing by a company that is making enormous profits,” said protesting unions in a statement Tuesday.
    President Hollande has pledged to reduce the country’s deficit but cutting spending by €60 billion ($81 billion) and increasing taxes by €20 billion ($27 billion), yet many of his policies are unpopular among French citizens. Not helping Hollande’s cause are the notable Frenchmen leaving the country, including famous actor Gerard Depardieu, former President Nicolas Sarkozy, and France’s richest man Bernard Arnault.
    And according to Patrick Young, Executive Director at DV Advisors:
    “The problem is that the French government is the biggest economic actor in France. It spends the equivalent of 56.5 percent of all the economic activity… There is absolutely no question, the French need incredible radical economic reform. It was not present under the Sarkozy administration and frankly the incompetence of Hollande, the president, has resulted in the situation we have now, massive outpourings of cash, 53 billion euro, that is the equivalent to 3 percent of the entire economy, left the country during October and November last year.”

  • forbin

    what drives any markets these days ?

    short answer = QE

    Forbin

    NOTE : if you or I did this type of thing we’d be done for rigging the market or fraud – national governments ( with the banks) make the rules so are immune in most respects

  • ernie

    Re the Euro. I’m no wiser than anyone else but I have read recently on one blog which concentrates on money supply issues above most others, that the ECB has in effect been tightening lately (repayments of some of the LTRO from 2011) and euro money supply has been falling a little. Contrasting this with the huge increases pumped out in other currencies may be the answer to euro strength. One has to assume that when this technical issue reverts then the exchange rate will take a significant knock. This should (should!) be the case when the extreme weakness of several eurozone economies is again looked at by markets which at the moment are ignoring anything which contradicts the “all is well” meme.

  • Anonymous

    Shaun,

    Problems with Credit Agricole wirtedowns and French Gov. buildings to be in darkness overnight to save money – Eiffel Tower exempted for now!

  • Pavlaki

    QE has been going on for quite a while during which time the £/Euro exchange rate stayed around 1.22 to 1.25. I could accept that QE might cause a drift towards 1.20 but the recent change has been very dramatic and I think something else must be at work, hence the question for Shaun!

  • Midge

    Hi Shaun and thanks for this blog.You have quoted figures for France that you rarely see on BBC,CNBC or Bloomberg.These figures look truly grim and despite the rhetoric things in Europe are not about to change anytime soon.It’s hard to imagine much change for the large car manufacturing companies doing anything else than shedding jobs.The rise in the Euro seems to make no sense but that is the time we are living in at the present.The fall in GBP looks excessive but what Mr King wanted.Things can change rapidly but as I type Brent Crude is nearly $117 pb and GBP is worth $1.57.So more letter writing coming up.Also more work for the Fed as unemloyment rate rose to 7.9% a long way from the desired 6.5%.So if government bonds are in a bubble this is likely to persist for some considersable time yet.

  • Rods

    Hi Shaun,

    Another excellent piece of analysis. I would have to disagree with you over the Mali situation as this has been deteriorating for some time and the French do have a history of strategic interventions in Africa, so I think is is a coincidence rather than doing an Argentina.

    How Reinhart and Rogoff 90%+ principal will affect France I would have though would be dependent upon current average bond interest, bond maturity length and their deficit. What is their average bond interest rate and maturity length? We know from Greece, Ireland, Portugal and Italy that market sentiment can change very quickly and cause problems, so the higher their debts get, the bigger the potential fallout.

    I take the Euro situation as being a ‘safe haven’ currently from debasement. When things start to get worse this will change.

    Why the surprise on France’s declining output. Most business people tend to work long hours. With up to 75% tax, I’m sure many are either spending more time with their families or busy working on off-shoring the business and emigrating. Socialists might think they are very clever in setting penal taxes to spend other people’s money, but Countries and Governments are within fixed borders, people aren’t and the more their feathers are plucked the more effort they will put into finding greener pastures. It has never been easier with the free movement of people in Europe. This on top of a Eurozone wide recession is a pretty toxic mix.

  • David Lilley

    I agree entirely with your comments. I think everyone in the West would agree that Mali is an elephant trap and as you state at first it seems to be so easy for the foreign army, but with the introduction of every foreign boot the resolve and support for the insurgents multiplies and ten years latter we go home.

    A significant fact is that 98% of Algeria’s income is from oil and gas exports and much of the gas supplied to southern Europe comes from Algeria.

    As regards France being suicidal the evidence is astounding. A 75% top tax rate and reversing the 2 year rise in the retiring age.

    The result of rising the top tax rate to 50% in the UK was, according to HMRC, that 10,000 of our 16,000 highest earners left the counrty and that cost the exchequer £3b. The tax take from these people dropped from £3.5b to £600m which is equivlent to £500 per working person per year. London is the fifth largest French city by population and Boris is rubbing his hands for the new influx of talented French immigrants.

  • forbin

    re: top tax rate – how many who left were British? it was worth the money to get rid of these people – did not affect the housing market in London where apparently they all live …..

    re: French ” talent” – hmm, talent as in full of gold no doubt – the last thing London needs is more lazy rich folk to pump up the already bubble land housing market there

    I have never been convinced that a whole load of fly by night Supa Rich improve the economy – apart from some low paid servant jobs and pumping asset prices up ( if not , erm, “pumping” the servants as well! )

    Forbin

  • Anonymous

    Hi Dr Blighty and welcome to my part of the blogosphere
    Some I think is due but it is a long way from being a hard rule. I make note of it as the research they did did hint at issues there but feel that as we move from 90% and go higher they build. It is certainly of much more merit than the Euro area 120% level which was only used because otherwise Italy was exposed…..
    Perhaps a combination of bond yields and national debt/GDP ratios would be better.

  • Anonymous

    Hi pavlaki

    One of the issues of imposing theoretical economics models on exchange rates is that they very rarely work although some work if you use them as reverse indicators!

    Why? I think that there are periods which can persist for months where other factors come into play.

    1. A fair bit of market exchange rate trading is technical rather than market based.

    2. One of my favourite pieces of economics work is where Rudiger Dornbusch discussed overshooting exchange rates.

    3. People love a trend aka Euro up Yen down for example.

    4. The economics numbers which prove harm or good is coming from this take a while.

    But here is something from Kathimerini hinting that the effect of the Euro rise is being felt.

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_01/02/2013_481797
    I have sent them a message to say the trade weighted Euro is now up ~9% from the lows of last summer.

  • Anonymous

    Hi Justathought
    Thank you. There is much that is unclear still about what will happen in 2013 for example will oil prices continue their rise? But we do know from experience what Euro area austerity does to an economy which is decelerating/shrinking and so far it has not been pretty.

  • Anonymous

    Hi Chris
    I am expecting more writedowns from the French banks and probably quite substantial ones.

  • Anonymous

    Hi Ernie
    The numbers for Euro area money supply were a disappointment for optimists as they showed slower growth. Also the impact of the money supply growth should be feeding in soon if it is going to help.
    Moving forwards we have seen some fairly substantial LTRO repayments and the 9% rise in the Euros value since July. So the easing has been followed by a tightening posing the question will the ECB cut interest rates again?

  • Anonymous

    Hi Midge

    I did some numbers as of Thursdays close and the price of a barrel of Brent crude was £72.62 then compared with December’s average of £67.91. However its rise and the pound’s fall yesterday has pushed it to £74.41 so its over 9% up now on December’s average.

  • Anonymous

    Hi Rods

    Thank you. As to the French government bond market the average maturity is 7 years and 37 days so not too bad by Euro area standards although much worse than the UK. The average interest rate is very low too at 1.33% according to the French Treasury Agency but this includes short dated bonds/bills at very low yields..