French services sector shrinks at fastest pace in nine months

Thursday 20 February 2014 11.50
Markit's index for the French services sector fell to 46.9 from 48.9 in January, a nine-month low
Markit's index for the French services sector fell to 46.9 from 48.9 in January, a nine-month low

France's service sector saw the biggest contraction in nine months in February, a survey showed today.

This hinted that a weak economic recovery remains fragile and the country is still lagging behind European peers.

Data compiler Markit said its composite purchasing managers' index - a broader measure of private sector fortunes - fell in February to 47.6 from 48.9 in January, dropping further away from the 50-point threshold dividing an expansion in activity from a contraction.

"It's a very disappointing reading from the business community," Markit chief economist Chris Williamson said. 

"We'd hoped late last year that with GDP growth in the fourth quarter we might see a return to growth in the PMIs, but that has not materialised," he said.

Markit's index for the services sector fell to 46.9 from 48.9 in January, a nine-month low that was well under economists' average expectations for an increase to 49.4.

In the manufacturing sector, the index fell to 48.5 from 49.3 in January, a two-month low that was under the average expectation for a reading of 49.6.

The flow of new orders for private sector companies fell for a fifth month in a row in February, the sharpest rate of contraction since June, with both service providers and manufacturers recording declines in new business.

Private sector employment fell for a fourth consecutive month with slight declines in staffing levels in service and manufacturing firms. Prices charged by firms fell again, although at the slowest rate for five months.

The readings poured cold water on hopes for a recovery gathering momentum in the euro zone's second-largest economy after data showed it had expanded by 0.3% in the fourth quarter and on average over all of 2013.

The French central bank, in its first estimate of first-quarter GDP, forecast earlier this month that the economy would grow by a meagre 0.2% in the three months from January to March, lagging behind faster-growing euro zone peers.

Hinting that growth in France has so far largely come from abroad despite ongoing reform efforts, Markit's survey showed that new export orders for manufacturers had increased for the second month in a row.

"The government needs to do a lot more to convince business that there are reforms under way to help them expand their business and help bring France more in line with countries like Spain and Italy," Williamson added.

Socialist President Francois Hollande called in January for a pro-business shift in policy, unveiling plans to cut the country's high cost of labour by €30 billion by phasing out charges that firms pay to finance family benefits.

Businesses welcomed the idea, but they have so far pushed back strongly against plans to tie the tax break to meeting new targets on hiring and investing.

Perhaps reflecting optimism about the reforms, which are designed to kickstart investment and hiring amid joblessness above 11%, business expectations in the service sector improved to the highest for almost two years.