Business Enthusiasm Cools a Bit in France & Italy Amid Generally Constructive Climate

Businesses in France and Italy, mostly manufacturers, reported some tapering down of confidence in December surveys. Conditions in general are much better than in the previous couple of years, but readings in these surveys have eased since the summer.

In France, the INSEE monthly survey was off 2 points in December to 106 from 108 in November. This put the average for all of 2006 at 107. The December value is up from 102 last December and the average of 101 for all of 2005. These indexes are a synthetic measure, scaled to average 100 over time. So businesses assess their conditions as 7% "better than average" this month.

The mixed and skittish nature of business conditions is suggested, though, by the fact that the current assessment of industrial production dropped suddenly to -2 in December from +14 and +21 in November and October, respectively. These data are net balances, the percentage experiencing or expecting positive outcomes less the percentage on the negative side. Wide swings tend to appear in these French data, so it's hard to judge the significance of any single month. Order books also give an ambiguous picture. The net balance in December was -7, worse than recent readings, particularly the -3 that prevailed in July, August and September. However, such erosion is modest compared with the much bigger declines that characterized the last five years.

In Italy, the privately conducted ISAE survey showed flat business confidence in December at 96.7 on a base of 2000=100. The peak in this survey was 98.2 in June. All of 2006 averaged 95.8, a noticeable improvement from readings in the mid-to-high 80s that carried through from 2001 until this year. Near-term production forecasts eased to +17 from a peak of +23 in June, but again, lower expectations were the norm for much of the time since 2001. Order books at Italian companies are even clearer in this distinction: the December balance is +5, the highest number since November 2000, and in fact the non-negative readings since June are the first since December 2000.

So industry in Italy and France is experiencing improved conditions, suggesting they have weathered the near-recession in 2000-2001 and the growing competition from Asian manufacturers. But we'd guess that recent high energy and commodity prices, along with a strong euro, have slowed them down lately. Hopefully the let-up in oil and copper prices will help stabilize their activity, although other metals, especially tin, lead and nickel, are still strong.