French business slump deepens as firms slash prices: PMI

[October 23, 2014]  PARIS (Reuters) - France's business downturn deteriorated in October to an eight-month low as firms cut prices at the fastest rate since the global financial crisis in the face of weak demand, a survey showed on Thursday.

The pace of price cutting in the euro zone's second-biggest economy may feed European Central Bank concerns as it battles to ward off deflation in the 18-nation bloc.

Data compiler Markit's preliminary composite purchasing managers' index (PMI) for October fell to 48.0 from a final reading of 48.4 in September.

That brought the index to its lowest level since February and took it further below the 50 point line denoting expansions in activity.

"Given that government spending is probably still rising in France, this is probably a sign of stagnation in the economy that we are signaling at the start of the fourth quarter," Markit chief economist Chris Williamson told Reuters.

"France is certainly acting as one of the key players acting as a drag on the growth in the euro zone as a whole," he added.
 

There was more encouraging data from national statistics body INSEE, which showed French industrial morale had risen slightly in October to 97 from 96 the previous month and above an average forecast of 95 in a Reuters poll of economists.

Markit's manufacturing data, however, gave no indication that the slump had reached a trough.

Its manufacturing index fell to a two-month low of 47.3 from 48.8 in September, well short of the reading of 48.5 expected on average by 18 economists polled by Reuters.

Its services index fell to an eight-month low of 48.1 from

48.4, falling slightly short of forecasts for 48.2.

"It looks like the situation is going to worsen instead of improve as indicated for example by new orders," Williamson said.

The flow of new business slowed in October with services firms seeing the weakest orders since June 2013. Firms also laid off staff at the fastest rate since April 2013.

Putting pressure on already squeezed margins, businesses saw rises in input prices for the 17th month in a row while they cut their selling prices at the fastest rate since October 2009.

"That will very much add to worries of deflationary forces setting in," Williamson said, adding that the price-cutting was strongest in the service sector, which tends to be more dependent on domestic rather than foreign demand.

The French government has been counting on a gradual pick-up in business activity in the second half and has already cut its 2014 economic growth estimate to 0.4 percent from 1.0 percent previously after the economy stagnated in the first half.

(Reporting By Leigh Thomas and Nicholas Vinocur; Editing by Hugh Lawson and Susan Fenton)

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