French Business Climate Indicators Pointing to Recession

France's overall business climate indicator continued its downward path in January. The measure is so designed that it's long term average is 100.& It declined to 91 in January from 92 in December and was 14.15% below a year ago. The Construction and the Services Climate Indicators components rose one point from December to January, the former from 99 to 100 and the latter from 91 to 92. However, over the year, construction indicator was up 1% while the Services indicator was down 11.54%. The Climate Indicator for Industry component worsened by 3 points from 94 to 91 between December and January and was down 14.95% from January 2011. The retail trade Climate Indicator component declined by 4 points to 89 in January from 93 in December and was 17.59% below a year ago.

The overall business climate and its components are shown in the attached chart that also shows recession shadings for the last three recessions in France. The current path is more reminiscent of the path that led to the last two recessions than that of the 1992-93 recession.

While the Climate Indicators may be able to suggest tendencies to recession and expansion, their usefulness as predictors of the actual path of retail sales and industrial production is questionable. The R² between the Climate Indicator for industry and industrial production is only about 41%.which mean that the climate indicator explains less than half of the variation in industrial production. The R² between the Climate indicator for retail sails and actual retail sales is only 5%, meaning that the climate indicator explains a mere 5% of the variation in retail sales. The second chart compares the Climate Indicator for Industry with Industrial Production and the third chart, the Climate Indicator for Retail Sales with Retail Sales.