Eurozone industry close to stagnation, yellow vests cloud France’s outlook

LONDON (ICIS)–Manufacturing sector growth in the eurozone slowed further in January, although expectations of future business conditions improved slightly from December, analysts at IHS Markit said on Thursday.

France’s corporates said the second eurozone economy had entered into a downward trend after social unrest in November and December caused optimism to dwindle, putting the country on a recessive path.

The eurozone’s industrial output activity slowed down to 50.5 points in January, down sharply from 51.4 points in December, according to Markit’s Flash Eurozone Manufacturing PMI index.

A reading above 50.0 points shows economic expansion, while one below would show a contraction.

The 19-country currency union’s manufacturing index stood therefore at close to stagnation, in line with other economic indicators which showed the eurozone’s industrial sectors ended 2018 on a much softer note than at the start of the year.

“The factory sector reported the weakest expansion since the current production upturn began in July 2013, while the service sector expansion was the smallest since August 2013,” said Markit.

“Looking ahead, future optimism improved slightly during the month [January], though remained close to recent four-year lows to reflect a gloomier picture than seen throughout much of last year.”

Despite the more optimistic outlook recorded in January compared to December, concerns for the year ahead are mounting due to “the overall bleaker economic picture” linked international trade tensions, the UK’s impending departure from the EU and rising “political stress”, especially in France and Italy but also globally.

“The weakness of the auto sector also remained a key area of concern,” said Markit analysts, after the automobile sector had to take in new carbon dioxide (CO2) emissions testing regulations in 2018, which caused a sharp drop in the sector’s activity.

Germany’s manufacturing, where the automobile sector is a key end consumer for chemicals and a labour-intensive industry, posted its second-weakest reading over the past four years, said Markit.

“The [German] headline manufacturing PMI recorded the first deterioration in business conditions since November 2014, fuelled by the largest falls in factory orders and exports seen since December 2012,” it added.

In France, social unrest continues causing uneasiness among manufacturing corporates, with activity in industrial sectors increasing its rate of decline.

“[The decline was] blamed on the combination of disruptions caused by on-going gilets jaunes [yellow vests] protests and a generally weakened demand environment,” said Markit.

The yellow vest movement has been described by political analysts as a social revolt by France’s middle classes who have seen their incomes stagnate since the 2008 global financial crisis while the costs of living increased.

They argue that President Emanuel Macron does not cater for their interests but for those of businesses. Although the movement is not a political party, it has affected Macron’s popularity ratings, which are at record lows since he started his tenure nearly two years ago.

“[In France] Output fell in both manufacturing and services [in January], resulting in the largest overall drop in business activity since November 2014,” said Markit.

Markit’s chief economist Chris Williamson said that apart from the current political woes in key countries like the UK or France, the data for January among both the manufacturing and services sectors showed a “deeper malaise” setting in.

With the current market conditions, he added, the European Central Bank (ECB), which is set to tighten its quantitative easing (QE) programme and start raising interest rates, would be wiser to “acknowledge that downside risks” to the economic outlook are currently predominant in the eurozone.

“Both the manufacturing and service sectors are close to stagnation, highlighting the broad-based nature of the current slowdown,” said Williamson.

“Companies are concerned about a wider economic slowdown gathering momentum, with rising political and economic uncertainty increasingly affecting risk appetite and demand.”

Pictured: Yellow vests demonstrate in Lyon, 19 January
Source: Konrad K/SIPA/REX/Shutterstock