A gloomy outlook for business sentiment in France suggests a diminishing economic vitality.

20 Oct, 2023

A gloomy outlook for business sentiment in France suggests a diminishing economic vitality.

In October, the business climate in France experienced a setback, declining by two points to reach a level of 98. This decline is evident across all sectors, indicating a widespread loss of economic vigor. Business leaders are less optimistic not only about past production and activities but also about future prospects in these areas. In particular, order books are seen as less robust in the retail and construction sectors, although they did show marginal improvement in the industrial sector.

This indicator, the first available for the fourth quarter of 2023, paints a picture of a French economy likely to continue its deceleration. Following a third quarter in which economic activity likely slowed considerably (with projected quarterly growth of 0.1% in Q3 compared to 0.5% in the second quarter), the dim outlook for business sentiment suggests that a rebound in the fourth quarter is improbable. The industrial sector faces challenges due to persistently weak order books, declining demand, especially from international markets, and a diminishing catch-up effect in various sectors. As a result, the industrial sector's outlook is bleak, and any rebound is not expected until 2024.

Concurrently, the construction sector is anticipated to witness a further reduction in activity due to rising interest rates, which are exerting an increasing influence on credit demand. Household consumption is also expected to remain subdued in the coming months. Despite wage increases that have allowed households to regain some purchasing power, the labor market is displaying initial signs of weakening, consumer confidence remains low, and inflation has proven to be more persistent than anticipated. Recent increases in oil prices tied to geopolitical tensions are likely to maintain energy inflation in France until the year-end and into 2024. This will continue to restrain household purchasing power and limit consumer spending. Consequently, retail and services sectors are likely to encounter weakened demand.

All in all, this data implies that the French economy is poised for further deceleration in the fourth quarter. We anticipate stagnation in GDP over the next three months, resulting in an average growth rate of 0.8% for 2023. The recovery in 2024 is expected to be gradual, weighed down by a pronounced global economic slowdown and a highly restrictive monetary policy.

Due to a negative carry-over effect, our forecast for average GDP growth in 2024 is a mere 0.6%.