Tuesday, January 10, 2012

EMU hope or false promise..again? The case of France

Bank of France Biz indicator shows some hope

The Bank of France has reported an increase in its industry sentiment index for December. This goes hand in hand with an unexpected rise, separately reported, in French industrial output, the later a gain of 1.1% for the month of November.

After months of EMU economic reports going from good to bad, the year-end has brought a certain respite especially to reports from France and Germany. The December readings for the MFG PMIs in the e-Zone have displayed a slight improvement in those readings across nearly all reporting EMU countries. Even so the MFG PMIs remain below the level of ‘50’ for all the observations in December, indicating only that the decline has slowed its pace and not that there is any real revival in progress since values below 50 tell of continuing slippage. Similarly, the EMU PMIs for services showed some bounce in December with only EMU members France and Germany having readings above 50, readings that indicate some growth in the services sector.

Still the Zone is beset with economic pressures and while there has been some revival in markets today and a bounce in banks shares for several key European banking institutions, the fact remains that austerity rules the euro-roost still, tilting EMU to weakness. The only really ‘pro-growth’ development of the past moth has been the continuing slide of the euro which has enhanced competitiveness among the members versus countries outside the zone and that is a silver lining a darkening euro-cloud.

Zone developments per se remain guarded with only a few slightly positive remarks coming from leaders who have been engaged in negotiations. Leading members continue to pressure Greece, a nation that already is under so much pressure that its real surprise is that it has not yet exploded.

France’s revival is depicted in its December PMI data the December bank of France pick-up and an outsized November jump in industrial output.

The BoF report, while showing month to month gains, still leaves the index at a weak position standing only in the 23.7 percentile of its historic queue of values (in other words the index is stronger 76% of the time). Industry orders stand in the bottom 12 percent of their historic rank. Overall demand is put in the 44th percentile, closer to neutral, but foreign demand stands in the lower 14 percentile of its historic queue. While the latest production result is still in the lower 21.9% of its queue, the outlook is just as weak in the bottom 21.6% of its queue. On balance there may be some stirring of economic data at year end but there is no real confirmation of any significant revival. Given the way data are, especially at year end, it is not clear that these machinations are anything more than statistical noise.

The zone remains under pressure and France is likely bracing to lose its AAA rating. These reports and survey results taken broadly rather than confirming that the Zone is bottoming, clearly bear too many hallmarks of a euro-disease spread to France. At these low levels of economic standing in the BoF survey and other surveys we are wise not to make much of them until they show some real trend and until those trends show some staying power. So far we have only one observation, not nearly enough. Markets often refer to one-off data reversals as ‘a dead cat bounce.’ So is this cat alive or not?

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