Monday 11 March 2013

Today's French industrial production is indicative of recession looming

"The only relevant test of the validity of a hypothesis is comparison of prediction with experience." - Milton Friedman 

Back in November in our conversation "Froth on the Daydream" we discussed specifically on France our concerns:
"As far as our new barometer of Euro Risk is concerned, all is not well. The 3% deficit target in 2013 is highly unlikely to be reached when one looks at a very simple economic indicator, namely France's industrial production and GDP growth since 2001. French recession will happen. Industrial production slumped to -2.5% the lowest level since 2009 and the biggest drop since January 2009. More than the 1% decline forecast by economists in a Bloomberg news survey. Not only industrial production is cratering but sentiment among manufacturers executives was unchanged at 92 in October.

Should industrial production print fell to -3.3%, we believe France will no doubt be in recession, putting in jeopardy its overly ambitious target of 3% of budget deficit in 2013 (A Deficit Target Too Far")."

Today's Industrial Production tumbled, which is indicative of a looming recession for France, as the output for factories, mines utilities and the construction industry fell 1.2% in the month from December when market expected only a 0.2% drop.
Overall on a YoY basis, France's Industrial production came at -3.5%, well below market expectations at -2.7% - source Bloomberg:
French industrial production (white line), French GDP (orange line) and French Services PMI (blue line, data available since 2006 only) - source Bloomberg.

In our first credit post of the year, namely the "Fabian Strategy", we sounded the alarm in relation to France being clearly in the crosshair in 2013:
The story for 2013 in Europe we think, will be France

More recently in our February conversation "Winner-take-all" we indicated:
"A sobering fact, services in the French economy represent around 80% of the GDP versus 76% for the rest of the European union. the latest read at 42.7 for Services PMI is the lowest since February 2009. Overall French composite PMI is at 42.3, the lowest level since April 2009. "

After shrinking 0.2% in the final quarter of 2012, GDP will shrink by 0.1% in the current quarter according to the median forecasts of 13 gathered by Bloomberg.

That would amount to France triple dipping into recession. The current 2013 budget is based on 0.8% GDP growth, and that target is clearly out of reach we think.

"The groundhog is like most other prophets; it delivers its prediction and then disappears." 
- Bill Vaughan, American journalist. 

Stay tuned!

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