French Business Leaders Increasingly Less Optimistic About T...| MENAFN.COM

Tuesday, 28 June 2022 11:51 GMT

French Business Leaders Increasingly Less Optimistic About The Future


(MENAFN- ING) Falling optimism

In France, the business climate indicator decreased slightly in June, reaching 104 compared to 106 in May, following a drop in retail trade and in the services sector. In industry, the business climate increased slightly. Although the level of the indicator is not in itself very worrying, as it is still above its long-term average, the details give more cause for concern. Indeed, the declines observed in the services sector and in retail trade were caused by a deterioration in the forward-looking components of the indicator. The business outlook and the demand forecast for the coming months were judged less favourably by the business leaders of these sectors. In industry, too, optimism about expected activity fell sharply. 

The PMI indices are all down by a large margin, and to a greater extent than expected. The composite index stood at 52.8 in June compared to 57 in May, with declines in both the service and industrial sectors. The output component for the manufacturing sector fell sharply into contraction territory (to 45.7 in June from 51 in May). 

Inflation peak in sight

Interestingly, both the business sentiment indicator and the PMI show continued strong price pressures, but these pressures appear to be stabilising (in the industrial sector) and even falling slightly (in the services sector). Faced with the slowdown in demand, companies therefore seem to be planning to increase their prices less in the coming months. This confirms our forecast of a peak in consumer price inflation during the summer, before a very gradual decrease during the last quarter of the year, assuming that the geopolitical backdrop does not lead to a new sharp rise in energy prices. We expect inflation to be above 5.5% for the whole of 2022.

A sluggish end to the year

Overall, these indicators suggest that the economic outlook remains strongly impacted by rising prices and slowing global demand. In the services sector, activity remains solid thanks to the end of health restrictions, and in particular to the very good tourist season expected for this summer. This should boost economic activity in the second and third quarters. At the same time, the outlook for services is worsening due to the inflationary environment that is depressing real household incomes, and the decline in consumer confidence. The current rebound in services looks set to end, probably by the end of the summer. In the industrial sector, companies are still struggling with supply and recruitment difficulties, which are limiting production for 72% of them. This implies that it will take time to clear the backlogs in production lines, which could continue to have a positive effect on activity. In addition, the activity forecast from industrial companies is falling sharply, which means that there is little impetus for production in the coming months beyond clearing the backlogs. Indeed, PMI surveys indicate that purchasing activity has recorded its first decline since November 2020, with companies now holding sufficient stocks to meet demand. This implies that inventories are likely to lead to a slowdown in activity.

For the growth outlook, all this implies that we no longer expect a rebound in French economic activity in the second half of the year. After the contraction in the first quarter and a probable stagnation in the second, the third quarter could be the most dynamic of the year, but the fourth quarter is likely to see a contraction again, due to high prices and the marked slowdown in global growth. We expect GDP growth of 2.1% in 2022 and 0.9% in 2023.

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