France on edge of return to recession, increasing pressure on Hollande

France on edge of return to recession, increasing pressure on Hollande

François Hollande's beleaguered socialist government was under increased pressure to boost the eurozone's second largest economy after a collapse in manufacturing orders tonight left it on the cusp of another recession.

A survey of French manufacturers found that output contracted and businesses shed jobs in November in response to the fastest slowdown in new orders since April, accentuating the single currency bloc's sluggish recovery. The services sector also declined, potentially sending the country sliding back into recession after having only emerged from one in the second quarter of 2013.

Hollande is already the most unpopular French president on record and can expect to face further charges of economic incompetence after the mainstays of French output and employment failed to reverse their fortunes ahead of the Christmas break.

French GDP shrank by 0.1% in the three months to the end of September and a second quarter of decline would put it technically in recession.

The government is under fire for presiding over a moribund economy that has kept unemployment at a record high. Only 26% of French people have a positive opinion of Hollande, according to the latest BVA poll, the worst score for a French leader since it began polling 32 years ago.

A series of climbdowns on tax reforms following violent street protests and intense lobbying by business groups have further undermined his authority. French footballers have proved a high-profile thorn in his side after they complained about a 75% tax on earnings of more than €1m (£850,000), which will be introduced in 2014. Only last week MPs conceded that Monaco players would avoid paying it following an appeal by the principality, a tax haven.

The dismal situation contrasted with Germany, which has enjoyed a prolonged recovery based on growing orders from new markets. A record increase in manufacturing output, according to the survey, gave a lift to the incoming coalition government of the chancellor, Angela Merkel, and helped to push the reading on the eurozone economy as a whole to its fastest monthly rate of increase since 2011.

Markit's flash eurozone composite purchasing managers' index (PMI), which gauges business activity across thousands of firms large and small, rose to 52.1 in December from 51.7 last month. It was the second-highest reading since mid-2011 and has been above the 50 mark that denotes growth since the summer.

But France's recent economic woes have dragged on the eurozone's growth and have probably weakened the Hollande government's ability to push through labour reforms while maintaining welfare and pension payments. With declining tax receipts, Paris will also struggle to make the investments needed to boost GDP.

Markit's chief European economist, Chris Williamson, said: "This is very much a manufacturing-led recovery. It's reflective of companies, especially in Germany, being more competitive and taking advantage of the upturn in global trade."

The latest signs of the French economy ailing comes as the carmaker Peugeot Citroën was reported to be close to signing a deal with Dongfeng Motor, a state-owned Chinese firm, with which it already has a joint venture, that would see much-needed capital injected into the manufacturer.

Meanwhile, a survey of French services firms found optimism ebbing, with the index drifting to 47.4 from 48.7 last month.

Moody's Analytics, a unit of the credit-rating firm, said: "This decline in business sentiment is starting to be a concern, as we were hoping the November decline was a consequence of the temporary political context and that December data would have reversed."

Analysts at HSBC were even gloomier, noting that the gap between Germany and France has rarely been bigger in a single month.

They said: "France looks increasingly worrying, with weak services recovery and manufacturing PMI pointing straight to contraction. One has only to hope that the looser relationship between PMI and GDP growth seen in France than elsewhere will play beneficially here. Some pre-emptive spending of consumers anticipating the tax increases planned for January may do just that."

France will raise its headline VAT rate from 19.6% to 20% on 1 January to protests from retailers and consumer groups. The small rise is seen as an attack on living standards already battered by four years of faltering recovery from the banking crash.

Business have also complained by a rise from 7% to 10% in the intermediate VAT rate that affects goods such as imported art works, which Sotheby's has said could benefit London and New York at the expense of Paris.

Banks in 'doom loop'

European banks have filled their balance sheets with national debt since 2011, bringing them easy profits but reinforcing a "doom loop" linking weak banks to governments with shaky finances, the European Union's banking watchdog has said.

The European Banking Authority(EBA), the European Union's banking watchdog, said the share of bonds issued by sovereigns under stress held by their domestic banks had "increased markedly" between December 2010 and June 2013.

The net exposure of banks to sovereign debt fell 9% in 2011 but then rose 9.3% in the 18 months to June this year, data showed.

The data confirms suspicions - that banks, particularly in Italy and Spain, have ploughed cheap funds from the European Central Bank into buying more of their own countries' bonds, a move that helps ensure governments fund their deficits at sustainable rates.

Regulators partly blame a move by banks to rein in cross-border activity and build up new liquidity buffers made up predominantly of government debt as a way of reducing risk.

But the EBA's data - which updated core capital and holdings of sovereign debt and loans at 64 leading European banks - is likely to reinforce fears that the fortunes of the banks and the states in which they are based are still too closely intertwined.

It will also fuel a debate over whether all government debt should be treated as equally risk-free when it comes to calculating bank capital requirements. Reuters