French business slumps but PMI suggests worst may be over

By Leigh Thomas

PARIS (Reuters) - France's beleaguered corporate sector saw business pull back further in April, two surveys showed on Tuesday, although one suggested that the worst of the downturn may be over.

In a rare positive sign for the euro zone's No. 2 economy, a survey of purchasing managers produced a much less bleak reading for business activity than expected, even though the INSEE official statistics agency found business morale had worsened.

Data compiler Markit said its preliminary composite purchasing managers' index, covering activity in services and manufacturing, rose to 44.2, from a four-year low of 41.9 in March.

Despite the sharp improvement, the index remained well below the key 50 point threshold dividing expansions in activity from contractions.

The service sector, which has gone through a particularly deep slump in recent months, saw its index jump to a four-month high of 44.1 from 41.3 in March, confounding economists' average estimate for a reading of 42.0. The sector accounts for more than half of French economic activity.

The manufacturing sector, which has shown signs of stabilising in recent months, saw a more measured improvement, rising to 44.4 from 44.0, slightly better than expectations for 44.3. Manufacturing makes up roughly 16 percent of the economy.

In contrast, the INSEE survey showed overall business sentiment fell to 84 in April, down from 88 in March and hitting its lowest level since August 2009.

The survey's widely watched industry morale index fell to 88, its lowest level since October 2009 and short of an average of economists' expectations for it to remain unchanged at 90.

"April surveys are all pointing to a weak beginning of the second quarter of 2013 after a first quarter that is not likely to be better than the last one of 2012, when the economy contracted," said ING economist Julien Manceaux.

"Therefore, it becomes hard to believe in a positive GDP growth figure for 2013," he added.


With the weakest profit margins in the euro zone, French corporate confidence has fallen steadily, reaching levels not seen since the 2008-2009 financial crisis as unemployment and austerity sap consumer and business demand.

Against that backdrop, economists say France will be lucky if its economy manages the 0.1 percent growth forecast by the government, estimating on average a contraction of the order of 0.2 percent.

Nonetheless, the improvement indicated in the PMI survey fuelled hopes that French firms may be turning the corner, especially in the services sector, where panelists have begun expecting business to grow.

"They're seeing obviously very weak demand and thinking it can't get any worse, surely it will get better," said Markit chief economist Chris Williamson.

Firms reported that new orders had fallen at the slowest pace in eight months, while service providers began in April to anticipate that business will pick up in the next 12 months.

Despite the improvement in the overall PMI figures, firms reported that they had trimmed staffing levels at a faster pace.

"There is really very little sight of either manufacturing or services returning to a state where demand in output is sufficient to start creating more jobs," Williamson said.

The unemployment rate has risen to a more than 13-year-high of 10.6 percent and monthly jobless claims due on Thursday will likely show a new record has been reached.

(Reporting by Leigh Thomas)