Challenges mount for eurozone economies: French business climate struggles amid persistent inflation, German economy contracts in Q3 confirmed

In November 2023, the economic environment in France witnessed a renewed decline, signalling a deepening concern for the prospective business landscape in the months ahead, as reported by ING Think. The euro zone's second-biggest economy anticipated growth is poised to decelerate. Concurrently, the Purchasing Managers' Index (PMI) figures underscore persistent inflationary pressures, emphasizing the prolonged timeframe required for any potential disinflationary trends.

However, in September 2023, the Bank of France, the nation's central bank, indicated that the economic growth outlook for the next two years is slightly lower than initially anticipated, attributing this adjustment to its primary trade partners' financial challenges. The Bank revised its forecast for 2023 upward following a surprisingly robust performance in the second quarter. Bank of France's quarterly economic outlook forecasts 0.9 per cent growth this year, up from 0.7 per cent in June.

Based on the data released by INSEE, the business climate indicator in November experienced a decline of one point, reaching 97 and marking its lowest level since April 2021. The National Institute of Statistics and Economic Studies (INSEE) is France's national statistics bureau. The degradation in the French business climate primarily stems from an unfavourable conjunctural situation in wholesale and retail trade, with decreases observed in order intentions and the volume of past sales. Additionally, the construction sector faces a less favourable business climate, attributed to a significant decline in the balance of opinion regarding planned staffing levels. In contrast, business sentiment remained unchanged in the industry and services sectors.

Moreover, the employment landscape affirms a downturn in the labour market, as the indicator has decreased by two points within the month, reaching its lowest level since spring 2021. This implies that the upturn in the unemployment rate observed in the third quarter is anticipated to persist. The November PMI indices, released today, reveal a continued economic downturn. The composite index dropped to 44.5 from October's 44.6, marking the sixth consecutive month below the 50 threshold. Manufacturing saw a significant decline in production, the sharpest since May 2020, affecting order books and business expectations in services and manufacturing. This poses a challenge for the European Central Bank, signalling prolonged disinflation in France. Inflation is expected to hover around 4 per cent in the coming months, with a likely return to 2 per cent consumer price inflation by 2025. Harmonized index projections suggest 2.5 per cent at the end of 2024 and 1.9 per cent at the end of 2025.

Germany boasts the largest economy in Europe, characterized by high industrialization and diversity. Its national economy contributes approximately 25 per cent to Europe's gross domestic product. However, a swift change is unlikely to come about in the near future, given the current stagnation in the German economy, as reported by ING Think.

The second assessment of Germany's third-quarter GDP growth has validated a slight decline in economic activity, registering -0.1 per cent quarter-on-quarter compared to +0.1 per cent QoQ in the preceding quarter. On an annual basis, the German economy contracted by 0.4 per cent. Persistent stagnation characterizes the German economic landscape, with growth observed in only two of the last six quarters since the onset of the Ukraine-Russia geopolitical crisis.

The German economy is currently experiencing sluggish growth compared to other eurozone countries. Various factors contribute to this weak performance, including cyclical challenges such as inflation, persistent energy price concerns, and uncertainty in the energy sector. Higher interest rates and China's evolving role, shifting from a thriving export market to a less demanding one, have further impacted the demand for German products. Alongside these cyclical factors, the country faces well-documented structural challenges, including demographic issues, the transition to renewable energy, and insufficient investment.