PMI Indices Signal Lingering Inflationary Pressures and Economic Slowdown in France

PMI indices point to continued strong inflationary pressures

The PMI indices for November, also published this morning, also point to a deterioration in the economic outlook. The composite index fell in November to 44.5, compared with 44.6 in October. For the sixth month in a row, the index is below the 50 threshold. According to the survey, it was manufacturing that was the main drag on activity, with manufacturers recording their sharpest fall in production since May 2020. Order books and business expectations are down in both the services and manufacturing sectors. Worryingly, the survey continues to point to significant inflationary pressures, particularly in the services sector, where inflation has accelerated compared with October.

 

This is obviously bad news for the European Central Bank as this indicates that disinflation will take time in France. Inflation is likely to remain close to 4% for the next few months, and it will probably be 2025 before consumer price inflation in France returns to 2%. We expect inflation, according to the harmonised index, to be 2.5% at the end of 2024 and 1.9% at the end of 2025.   

 

GDP expected to stagnate in the fourth quarter

Ultimately, the activity indicators published so far for the fourth quarter are weak and suggest that French economic growth is likely to continue slowing at the end of 2023. After GDP growth of +0.1% quarter-on-quarter in the third quarter, a rebound in the fourth quarter seems highly unlikely. We expect GDP to stagnate over the quarter, which would bring average growth for 2023 to 0.9%.

 

We believe that the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by monetary policy that remains very restrictive. Given the low starting point for the year, average growth in 2024 is likely to be weak, and well below the government's forecast of 1.4%. Our forecast for average French GDP growth in 2024 is 0.6%.