French industrial production slumped and confidence among factory executives held near the lowest in almost three years, prompting the Bank of France to indicate that Europe’s second-largest economy may be tipping into recession.
Production fell 2.7 percent in September from August, Paris-based statistics office Insee said today. That’s the biggest drop since January 2009 and more than the 1 percent decline forecast by economists in a Bloomberg News survey. With sentiment among manufacturing executives unchanged at 92 in October, the Bank of France said the economy may shrink in the fourth quarter. Previous surveys suggest it also contracted in the third.
That puts France on the verge of recession three years after it emerged from the last one as President Francois Hollande struggles to reduce the budget deficit and improve the nation’s competitiveness. With companies such as PSA Peugeot Citroen SA cutting thousands of jobs, unemployment has jumped to a 13-year high and the European Commission said this week that it’s likely to rise further.
“The latest French industrial data makes for particularly grim reading,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “The problem in France is the perennial lack of growth.”
While the French economy last shrank at the start of 2009, it hasn’t expanded since the third quarter of last year, with gross domestic product stagnating for the past three quarters. Insee will publish third-quarter GDP on Nov. 15.
Stocks, Euro Retreat
European stocks retreated, with the Stoxx Europe 600 Index heading for its biggest weekly decline since September. The index was down 0.5 percent at 269.26 at noon in Frankfurt. The euro was down 0.3 percent at $1.2713, a two-month low.
Europe’s sovereign debt crisis, which has already pushed five of the 17 euro nations into recession, is now starting to curb growth in Germany, the region’s largest economy.
The Brussels-based commission this week forecast the euro-area economy will expand just 0.1 percent in 2013 after contracting 0.4 percent this year.
In Italy, industrial output declined the most in five months in September, signaling the country remained mired in recession in the third quarter. Output fell 1.5 percent from August, when it rose 1.7 percent, national statistics office Istat said in Rome today.
U.K. Trade Deficit
Britain’s trade deficit narrowed more than economists forecast in September as exports rose, led by capital goods and chemicals. The goods-trade gap fell to 8.37 billion pounds ($13.4 billion) from 9.98 billion pounds in August, the Office for National Statistics said today in London. Exports rose 1.1 percent, while imports fell 3.9 percent.
Hollande plans to raise France’s main sales tax rates to finance a cut in payroll charges, throwing support behind businesses for the first time in a bid to counter a record trade deficit and revive growth. The plan involves 20 billion euros ($26 billion) in tax increases and 10 billion euros in spending cuts.
By lifting the two highest value-added tax rates in 2014, Hollande is revisiting a policy he campaigned against in his successful bid to unseat predecessor Nicolas Sarkozy earlier this year.
The move comes as International Monetary Fund and the commission increase pressure on France to improve its competitiveness as the debt crisis prompts neighboring Spain and Italy to overhaul their economies.
The commission predicts the French economy will barely expand next year as exporters continue to lose ground to competitors in other countries. GDP will rise 0.4 percent in 2013, half the pace expected by Hollande’s government, after 0.2 percent growth this year, the commission said on Nov. 7.
Hollande needs to embark on a significant overhaul of French labor laws to prevent the country from falling behind its European peers, the IMF said on Nov. 5.
“The lack of competitiveness in the French economy is now the major challenge to its macro-economic stability,” the Washington-based fund said. The economic discussion that Hollande has already started “represents a unique opportunity to undertake vigorous reform.”
Hollande’s deficit-reduction plan relies too much on tax increases, which hurt economic growth more than spending reductions, Bank of France Governor Christian Noyer said in an interview with Le Progres newspaper published today.
“I would prefer more savings from spending and less emphasis on revenue,” Noyer said. “Still, raising taxes reduces deficits more quickly. In future, the focus should be on spending.”
The plans are just the beginning as France seeks to restore competitiveness, French Finance Minister Pierre Moscovici said.
“We’re walking a tightrope,” Moscovici told business leaders in Dijon yesterday. The competitiveness plan is a “starting point, not the end of the story.”