French business activity shrinks

French business activity took a sharp turn for the worse in September, shrinking at its fastest rate since April 2009 as weak domestic demand and a deepening slowdown in southern Europe dragged the economy towards contraction.

The Markit/CDAF flash composite purchasing manager's index (PMI), a preliminary estimate of firms' activity that covers both manufacturing and services, slid to 44.1 in September, its lowest level in 41 months, from 48.0 in August.

It marked the seventh consecutive month that the composite number remained below the 50-point threshold separating a contraction in activity from expansion.

Markit chief economist Chris Williamson said the figures suggested that France's €2 trillion economy, which has posted zero growth in the last nine months, could shrink by 0.5 to 0.6 per cent in the third quarter.

"France is really starting to struggle quite substantially now," Mr Williamson said. "Its economy is suffering as its neighbours are seeing demand weaken and ... there are few signs of demand to stimulate growth in France."

Socialist president Francois Hollande has made reviving the stalled economy a priority since he took office in May but his efforts have been hampered by a wave of layoffs from companies including retailer Carrefour and car maker Peugeot .

Mr Williamson said September's gloomy outlook was surprising given the recent positive newsflow on the euro zone crisis, including the announcement of the European Central Bank's bond-buying programme, which had lifted financial markets.

"The fact that businesses grew gloomier is a big concern," Mr Williamson said, noting the data may have been skewed by the summer break. "It may be too early for the good news to have filtered through."

Business orders, which had slowed the pace of their contraction in recent months, fell at the fastest rate in three years as both weak final demand and uncertainty weighed, Markit said.

High international energy and commodity costs pushed input prices higher, while weak demand meant that output prices continued to fall, forcing companies to accept smaller profit margins.

"Investment will be hurt, as will unemployment. Companies will be moving further into cost cutting," Mr Williamson said.

Layoffs accelerated to the fastest rate in 34 months, with manufacturers and service providers both recording steeper falls in payrolls as work backlogs declined.

The contraction in activity was most severe in the manufacturing sector, which is more exposed to the weak international outlook. Activity here fell for the seventh consecutive month, sinking to a 41-month low of 42.6.

Overall new manufacturing orders fell more sharply than export orders, suggesting that deteriorating domestic demand was mostly to blame.

Household consumption, the motor of France's economy, is closely linked to unemployment, which is running at a 13-year high.

Service activity, meanwhile, worsened for a second straight month, sliding to a four-month low of 46.1, from 49.2 in August. Service providers' business expectations, which had improved sharply in August, slid back into negative territory in September for the first time since February 2009. The indices for outstanding business and new business in the services sector were also sharply weaker.

Reuters