French Confidence Gains as Recession Threat Eases

Tuesday, 10 Jan 2012 10:09 AM

 

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French business confidence climbed from a two-year low last month and industrial output increased in November, indicating the threat of a recession in the euro-region’s second-biggest economy is easing.

The Bank of France’s Business Sentiment Indicator for manufacturers advanced to 96 from 95 in November, when it fell to the lowest since September 2009. Industrial production unexpectedly climbed 1.1 percent in November, lifted by electronics and refinery output, national statistics office Insee said today. Both numbers beat economists’ forecasts.

The numbers suggest that France may be able to skirt a deep recession as European leaders impose austerity measures to contain the region’s sovereign-debt crisis. The confidence reading suggests French gross domestic product will stall and not shrink in the fourth quarter, the Bank of France said today.

“This is reassuring,” said Michel Martinez, an economist at Societe Generale in Paris. “The economy may have contracted in the fourth quarter and probably in the first quarter but the recession will be very mild. It’s not an implosion, not the 2009 scenario.”

Stocks rallied and commodities rose for a third day with U.S. index futures gaining. The MSCI All-Country World Index added 0.7 percent at 10:30 a.m. in London and Standard & Poor’s 500 Index futures increased 0.9 percent. The Shanghai Composite Index jumped 2.7 percent for its biggest three-day advance in 15 months on speculation the government may act to spur growth in the world’s second-biggest economy as import growth fell to a two-year low.

French Bonds

The euro strengthened 0.2 percent to $1.2791. The yield on France’s 10-year bond fell 6 basis points to 3.258 after Fitch Ratings said the country would likely avoid a downgrade this year.

Europe’s economy isn’t out of the woods and investors will be watching developments closely. Fitch today forecast a “shallow recession” for the euro region “as tough austerity measures continue to bite and consumer and business confidence remains weak.” Italy faces “a significant risk” of a rating reduction.

Finland’s economy grew at the slowest pace in 1 1/2 years in October as the debt crisis sapped export demand. GDP adjusted for working days expanded an annual 1.1 percent in October, slowing from a revised 2.3 percent increase in September, Helsinki-based Statistics Finland said.

‘Dangerous Territory’

Even with the monthly jump in output, French industrial production fell 1 percent in the three months through November, according to Insee. Order books are less full now than they were a month ago and inventories are at their target level, the Bank of France survey of manufacturers showed.

“Europe is still in dangerous territory as the sovereign- debt crisis has turned into a crisis of confidence,” Elga Bartsch, chief European economist at Morgan Stanley in London, said in a note to clients. “A mild recession over the winter could turn into a deep one if a full-blown, area-wide credit crunch materializes.”

French President Nicolas Sarkozy, who expects the economy to expand 1 percent in 2012, has repeatedly said he’ll make additional spending cuts and further tax increases if necessary to meet the government’s deficit targets as the economy slows. The austerity threats are sapping consumer demand and prompting companies such as PSA Peugeot Citroen SA and Societe Generale to cut jobs, fueling the slowdown.

ECB Rates

Societe Generale’s Martinez said policy makers’ response will be key to boosting confidence among companies and underpinning output. “None of this means that the situation can’t deteriorate,” he said.

The European Central Bank’s governing council meets later this week, followed by a press conference by President Mario Draghi on Jan. 12. The Frankfurt-based central bank will leave its key refinancing rate at 1 percent, according to the median of 51 forecasts in a Bloomberg News survey.

In contrast with European numbers, U.S. economic data have signaled improvement. Job growth picked up in December and consumer credit jumped by $20.4 billion in November, reports in recent days showed. A release today may indicate a monthly gain in wholesale inventories in November, with restocking forecast to add to gross domestic product.

In Asia, China’s import growth fell to a two-year low in December, underscoring a slowdown in the fastest-growing major economy. The moderation caused the trade surplus to increase to $16.5 billion in the month, as exports advanced 13.4 percent in December.

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