French Business Activity Falls Slightly in August, While Job Shedding Accelerates

Michelle Remo, “Big 4″ observer
September 10, 2012 /

French service providers signalled a decrease in business activity during August, albeit marginal.

This primarily reflected a further fall in incoming new work. Faced with spare capacity, companies made further reductions to employment, with the rate of job cutting picking up to the fastest for almost two-and-a-half years.

There continued to be a divergence in price trends, with input costs rising but output charges declining, indicating pressure on operating margins. Business expectations improved in the latest month, but remained well below the survey’s historical average.

Jack Kennedy, Senior Economist at Markit and author of the France Services PMI, said: “Worryingly, jobs were cut at the steepest rate since March 2010 as firms engaged in cost-cutting amid a continued divergence between rising input prices and falling output charges. This bodes ill for the labour market and could in turn further dampen consumer spending, which would tend to reinforce the weakness in activity.”

The seasonally adjusted final Markit France Services Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared with one month ago – slipped to 49.2 in August from 50.0 in July. The latest reading signalled a reduction in activity for the fourth time in the past five months.

The seasonally adjusted final Markit France Composite Output Index – which measures the combined output of the manufacturing and service sectors – posted 48.0 in August, little-changed from 47.9 in July. That was its highest reading in five months and indicative of a moderate rate of contraction.

Service sector activity declined primarily in response to a further drop in new business. Panellists commented on fragile demand conditions and client hesitancy as factors contributing to the fall in new work.

The latest decrease in new business was solid and sharper than in the previous month. Manufacturers also reported a drop in new orders, but the rate of decline eased since July. Consequently, overall new business across the private sector fell at the slowest pace since March.

Backlogs of work in the French service sector declined further in August, extending the current period of contraction to eight months. Moreover, the rate of decline quickened slightly. Composite data also signalled a reduction in outstanding business, although the latest drop was slightly weaker than in July.

Service providers reduced employment for a fourth consecutive month in August. Moreover, the rate of job cutting was the sharpest since March 2010. Across the private sector as a whole, payroll numbers declined at a slightly slower pace than in July, reflecting an easing in the rate of job cutting among manufacturers.

Input prices in the French service sector continued to rise during August. The rate of cost inflation was
solid and the sharpest in four months. There were reports from the survey panel that fuel, transportation and staff salaries had contributed to the latest increase. Input costs across the whole of the private sector rose modestly, despite a further reduction in purchasing costs in the manufacturing sector.

In contrast, output prices in the French service sector fell further, extending the current sequence of decline to five months. Anecdotal evidence suggested that strong competitive pressures had weighed on service providers’ pricing power, with a number of companies offering discounts in a bid to protect market share.

Composite data signalled that output charges decreased for the fourth month running, albeit at the slowest pace since May. Future expectations among French service providers improved in August. The degree of optimism strengthened to a three-month high, although remained considerably below the survey’s long-run average.

Panel members commented on company expansion plans, investments yielding fruit and promising pipelines of work as factors expected to support activity growth over the next 12 months. However, there are concerns surrounding the impact of weak economic conditions and uncertainty over new tax measures.

 

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