France: Business confidence hits its highest level in 5 years - ING

Julien Manceaux, Senior Economist at ING, notes that France’s business climate indicators by INSEE showed another improvement for August this morning and the trend is led by manufacturing but confidence in the service sector remains very high.

Key Quotes

“The main disappointing points in this release were the weaker hiring intentions shown in the service survey while future retail sales prospects declined strongly.”

“Business confidence improved again in France in August, with the INSEE business climate indicator reaching 109 after 108 in in July. These are the highest readings since the summer of 2011. Manufacturing led the trend, confirming the results of the preliminary PMI figures that were released yesterday and showing that French manufacturing activity is expanding at its fastest pace in more than two years. Today’s release shows that this is backed by a decline in stocks and strong foreign orders, which boosted the overall production outlook this summer. We therefore expect another strong quarter of industrial production growth in 3Q17, after which a stronger EUR could darken the horizon.”

“Confidence in the building sector remained stable in August, at 104. It recovered to its long-term average level in January and has been remained above it (100) since May, showing that the sector is contributing to the ongoing recovery, notably through job creation. On that front, the service sector survey was less positive. As the PMI did yesterday, the survey released this morning shows a slowdown in the activity expansion seen since the beginning of 2017.”

“Hiring intentions in the sector have been much lower since June than in the first 5 months of the year. The fact that hiring intentions are faltering despite the 5 year high confidence level in the sector could be giving early signs of renewed job market weakness. The unemployed population figure will be published tonight, if the surveys are right, the July figure could disappoint. For the moment, employment growth – though improving – remains subdued. On that front, the labour market reform to be presented at the end of next week could increase hiring intentions if it is passed smoothly, which is far from a done deal.”

“Finally, the retail sector showed similarities with services. The survey this morning disappointed as far as future sales prospects are concerned, while confidence declined to 108. Although the index remains higher in this sector than last year, a slowdown in consumer spending growth would be most unwelcome in the second semester as the trend remains positive in most European countries.”

“All in all, this week’s surveys are an indication of the continuing recovery in France, especially in manufacturing. French growth – having slowed from 1.2% in 2015 to 1.1% in 2016 - is set to rebound to 1.5% in 2017. Afterwards, if the new Government can take profit from the accelerating recovery to implement reforms, GDP growth could accelerate towards 1.7% in 2018.”