French Industry Climate Improves Production Outlook Weakens

Climate improved for industry in February. Manufacturing production expectations nonetheless weakened in February falling to -8.1 from -7.0 in January.

The recent trend for production is a net negative reading in February but it is improved from its weaker reading in January. The own-industry likely trend is assessed as stronger in February, that metric is the respondents’ assessment for the performance of his own industry, but that one too is weaker in February than in January. Both are below their historic means.

Orders and demand are a net negative in February, that reading is still above its historic mean. Orders and demand in February are slightly stronger than in January. Foreign orders improved in February and are well above their historic average.

The own prices and manufacturing prices overall weakened in February. Both are substantially weaker than a year ago, as well as below historic means.

Evaluated over the sample period back to 2001 all entries in the table are weak, below their historic medians, (a ranking of 50); foreign orders are the exception, they have a high 72nd percentile standing.

Foreign demand is an important factor supporting the French economy. Domestically the economy is struggling and politically dealing with farm protests. European conditions remain touch and go with the war on its door-step and new pressures to generate support for Ukraine while the US sorts out where it will stand in the middle of a political impasse.

The recent trends and expectations for production have weak standing and momentum. The good news is that inflation has weak momentum and a low standing, too. It is being driven back. The ECB is determined to reduce it further. A recent ECB communication has deemed the greater risk to be the risk of turning to ease too soon. Like in the US at the 11th hour central bankers in Europe may finally be waking up to the idea that reducing inflation from extremely elevated levels can be done but getting it all the way back down to target is more difficult and will require a more concerted effort. For a while it appeared that central bankers would be willing to cruise with inflation in an uncomfortable zone still above target. Now maybe they are deciding that they really need to get to their target values sooner rather than later. However, the state of the French economy is a reminder as to why this is difficult. The French economy is weak and in recession. It wants interest rate help. Markets have been looking for rate reductions for some time. But central banks had been so reluctant to hike rates further when inflation peaked, that they are left with inflation progress to proceed slowly, and this could also mean lingering high rates to go the final mile on inflation progress. This is not what markets want now. But it is a reminder that policy choices that seem to avoid the hard policy options, often wind up paying the piper in a different way that may also turn out to be painful.