This week I have covered the situation in Greece and Spain as I have reviewed the deteriorating economic situation in both of those countries. I found a little more cheer in Ireland although something of a caveat has developed there which I intend to address in due course. Those who have followed my twitter coverage will have noted my updates on this subject. However as well as the countries in the Euro area which are plainly in distress there are others who are on the edge of it. A little like a Swan serene on the surface but perhaps paddling hard invisibly under it. To my mind France is in this category and I intend now to explain why I think this.
Serene as a Swan
This is an easy bit as we only need to take a look at her government bond prices and yields. Her benchmark ten-year bond yield is at 2.16% so she is under no pressure from the so-called “bond vigilantes” and can finance her borrowing and debt maturities cheaply. Compared to this time last year when the yield was circa 3.5% there has been a clear improvement.
If we look wider at financial markets her stock market looks stable with the CAC-40 index again higher than a year ago. However the serenity weakens somewhat here as we observe that at 3396 it remains a long way from the pre credit crunch peaks in the 5700s. By contrast the German Dax benchmark is quite near to its pre credit crunch highs.
Paddling hard under the surface
The French statistics office has told us this today.
In September 2012, manufacturing outputdecreased strongly in volume (-3.2%). Output decreased in industry as a whole(-2.7%).
So weak looking numbers on the month and if we look back for some perspective we see this.
Manufacturing output decreased by 1.9% (y-o-y). (They do not tell us here the industrial production numbers y-o-y so let me help them out they are -2.1%)
We can take further perspective by looking at the underlying indices where 2005=100. Industrial production is at 89.4 and manufacturing is at 88.7. So France has a fair way to go to get back to 2005 levels and sadly she is currently going the wrong way.
Putting it another way she has gone back to 1996/97.
Investment is weakening too
Surveyed in October 2012, business managers forecast that investment in the manufacturing industry would slightly increase by 1% in 2012. They revised 4 points downwards their previous expectations given in July 2012.
Surveyed for the first time on their 2013 investment prospects, business leaders forecast a decrease in their investment between H2 2012 and H1 2013.
So we see that business leaders are expecting a weakening and if we look for detail whilst they expect some weakening in export markets the main driver is the domestic one.
Unemployment is rising
The last full report told us this.
In Q2 2012, the average ILO unemployment ratein metropolitan France and overseas departments stood at 10.2% of the active population.
However Eurostat reported last week that the seasonally adjusted unemployment rate was 10.8% in September which shows a worrying rise in what after all was supposed to be part of the recovery period.
What about government debt?
This is rising too as at the end of the second quarter it was 1.833 trillion Euros compared to 1.696 the year before. Compared to economic output the ratio rose from 86% to 91%. So if Reinhart and Rogoff were right about 90% being a significant barrier or threshold France has now crossed it. Going forwards she only intends to borrow more although of course the growth of this is expected to be reduced by her plans for austerity. At this point I would just point out that so far the record of austerity in actually doing this has been poor.
Austerity will weaken her economy
The 30 billion extra Euros of austerity announced back in September will begin to bite as time goes by. Put another way it is around 1.5% of economic output which is intended to be subtracted during a downturn. We now know where that road leads and it leads to economic decline which could be quite sharp.
What do the surveys tell us?
The purchasing manager’s indices give us the most timely information that we receive and they tell us this.
Final Markit France Services Activity Index at 44.6 (45.0 in September),
Final Markit France Composite Output Index at 43.5 (43.2 in September),
If we add in that her manufacturing index was at 43.7 we see that all of these are much lower than the benchmark of 50 and show a considerable contraction rate. So we can expect the official numbers to continue to deteriorate.
The Bank of France has added in its business sentiment indicators today and you get a flavour of it from the numbers being 91 and 92 against a benchmark of 100 but interestingly they add this.
According to the monthly index of business activity (MIBA), GDP is expected to decline by 0.1% in the fourth quarter of 2012 (first estimate).
What about the French banks?
When the credit crunch began we saw an extraordinary amount of hubris from the then French President Nicholas Sarkozy. He blamed Anglo-Saxon banking for the credit crunch.
Even our Anglo-Saxon friends are now convinced that we must have reasonable rules
This had the implication that the banks of La Republique had avoided such behaviour. Unfortunately for France they have not. Several of them decided that Greece was the place to expand in at on the newswires today are the results of one of these expansion plans. From Bloomberg.
Credit Agricole, led by Chief Executive Officer Jean-Paul Chifflet, agreed last month to sell its Emporiki Bank unit to Greece’s Alpha Bank under terms cutting the French lender’s net income by 1.96 billion euros. The company is ending a six-year investment in Europe’s most indebted country as concerns linger Greece might exit the euro area.
Credit Agricole has declared a 2.85 billion Euro loss for the last quarter which apparently in the way of modern-day accounting means that if you exclude all the losses it may have a profit! So she is further weakened ahead of a likely French economic slowdown. As I type this her shares are down 6% as investors digest a 2.2 billion Euro investment which caused a total of 5.7 billion Euros of losses.
Also my old friend Dexia has been in the news. From Bloomberg.
Belgium and France, wrestling for more than a year over the second rescue of Dexia, agreed on a 5.5 billion-euro ($7 billion) recapitalization of the bank and will charge the bank less for its government funding backstops.
These problems keep returning do they not? Dexia seems to be simultaneously occupying steps 8 and 11 of my timeline for a bank collapse.
French taxpayers may well be concerned by the fact that their share of the Dexia bailout seems to have risen from 35.6% to 45.4% on the quiet.
As can be seen from today’s update there are genuine concerns that France is next on the list for the by now familiar Euro area austerity inspired downwards spiral. As she weakens more and more eyes will turn to her ability to support her weakened banking sector. As you can see from the above the bills are beginning to mount. But also she faces a bill from the bailout programmes she is committed too for her Euro area partners who are in trouble. As of the latest numbers up to the end of the second quarter such lending represents some 1.7% of her GDP to this we can add and rising. Lower income and higher debt does not make a happy mix make as Mr. Micawber observed all those years ago.