Economy shrinks in France, recession looms in Europe

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The specter of recession hangs over the tricolor economy. After a disappointing first half, French activity sank into a contraction zone in August. The PMI, that of purchasing managers, revealed on Tuesday, August 23, fell into negative territory at 49.8 compared to 51.7 in July. This is a year and a half low. As a reminder, activity decreases when the index is below 50 points and expands when it exceeds it. “High inflation, combined with a fading post-pandemic demand rebound, has prompted businesses and consumers to slash non-essential spending, leading to the first decline in demand for services since March 2021.” “. economist Joe Hayes said in a statement.

As the political back to school looms, the government will have to deal with a worse-than-expected economic situation. Even if the second quarter was better than expected with 0.5%, the end of the year promises to be dangerous. In fact, the dark scenario of a gas cut in Russia could be a serious blow to the economy of the Old Continent. The German PMI index reached its lowest level in almost two years in August at 47.6. Across the Rhine, the economy is headed straight for a recession at the end of the year. Added to this is the tightening of monetary policy in the euro zone, which could suddenly slow down activity.

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The industry in red

The engines of the tricolor industry are running out of steam. The manufacturing industry index fell to 49 points in August from 49.5 in July. This is a minimum of 27 months. Since the start of the pandemic in March 2020, Made in France has been heavily affected by multiple difficulties. Between supply chain chaos, rising energy prices, component shortages and border closures, many factories have had to scale back or even stop production.

All industries dependent on foreign countries still struggle to obtain raw materials. In addition, manufacturers have to deal with the disastrous consequences of inflation. In fact, demand has collapsed in recent months in the manufacturing sector. This decline in the industry could have cascading effects on many services.

Some of the activities that were previously accounted for in industry are now outsourced to the tertiary sector. Thus, although the weight of industry in GDP has been considerably reduced, many SMEs and VSEs depend on industrial activity. Finally, although the fall of the euro against the dollar allows French industry to gain in competitiveness, this depreciation fuels the costs of certain imports denominated in dollars. This risks fueling inflation imported from abroad.

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services resist

On the services side, activity slowed down in August to 51 points compared to 53.2 points in July. This is a minimum of 16 months. Despite this decline, activity remains on positive ground in services. The return of foreign tourists after two long years of the pandemic has triggered demand in the territory and accelerated service exports.

However, the drop in domestic demand in 2022 could weigh on service consumption at the end of the year. Given the weight of the tertiary sector in the tricolor economy, growth could thus mark the time in the fall.

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Inflation continues to threaten

After reaching 6.1% in July, inflation continues to threaten activity. In fact, the French have already started to tighten their belts since the beginning of the year. Labor income in the private sector plummeted in the first half of the year according to recent statistics from the Ministry of Labor. This decline affects all professional categories.

Aside from the minimum wage, wages have not been indexed for inflation since the early 1980s. As a result, employees are losing purchasing power. INSEE expects a 1% drop this year. For its part, the OECD forecasts, in a press release, a 1.9% drop in real per capita income in 2022 in France. This is the largest drop of the G7 countries, the seven largest economies on the planet.

Government measures (rate shield, gasoline bonus, revaluation of social minimums) have made it possible to limit inflation, but a large part of the active population is bearing the full weight of inflationary pressures. On the eve of the start of the school year, many households have to face incomprehensible expenses in material and stationery in particular.

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The eurozone is dangerously close to technical recession

On the eurozone side, the indicators turn red one after another. After a strong rebound in 2021 after covid, growth is expected to slow sharply in 2022. According to the latest PMI index, activity contracted in August to 49.2 after an initial drop in July to 49.9. With two consecutive months of decline, the eurozone economy is approaching technical recession. This phase is defined by two consecutive quarters of falling activity. ” The latest PMI data highlights a contraction in the eurozone economy in the third quarter of 2022. economist Andrew Harker said in a statement.

As for the consumer price index, economic analysts continue to fear a rise in the coming months in the monetary union. ” The inflationary shock is very important. The peak of inflation is probably still ahead. The rise in the harmonized consumer price index (IPCA) could reach 10% in the drop in the euro zone. Such inflation could clearly squeezing trade margins, recently explained the BNP Paribas economist Hélène Baudchon interviewed by The galery. Geopolitically, the war in Ukraine continues to destabilize all of Eastern Europe. Even if the combined weight of Ukraine and Russia in the world economy remains limited, the continuation of the conflict could still do a lot of damage.

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