French economy buckles as car sales collapse

 Markit’s purchasing managers’ index (PMI) for French manufacturing remained stuck in slump in November at 44.5 and is now the weakest in the eurozone after Greece.

"The figures are shocking," said sovereign debt strategist Nicholas Spiro. "France has been sailing dangerously close to the wind for some time but is now tipping into outright contraction."

The Committee of French Automobile Producers (CCFA) said this has been the worst year for the French car industry since 1997 - and for almost half a century in total volume - with little chance of recovery next year as Paris pushes through scorched-earth fiscal tightening of 2pc of GDP to meet EU deficit targets.

Sales of French cars fell 28pc in November from a year earlier, with Citroen down 26pc and state-owned Renault down 33pc. Foreign brands fell just 7.9pc. "The middle class, which tends to buy standard French cars of between €10,000 and €20,000, has been particularly badly hit by the crisis," said the CFFA’s François Roudier

The severity of the decline stunned analysts and suggests that France has at last been engulfed by the festering crisis across the Mediterranean region.
 

The country has been bouncing along at near zero growth for a year and half but has managed to keep out of technical recession, partly because it has been cocooned by a Leviathan state and has put off hard decisions.

The economy seems to have buckled abruptly over the Autumn, sheding more than 40,000 jobs a month. Unemployment has risen to a euro-era high of 10.7pc.

The French car industry is still a pillar of the economy, employing 400,000 workers, but has been losing market share at an accelerating pace over the last decade. Output has fallen from 3.5m vehicles in 2005 to near 2m this year. The country became a net importer of cars for the first time in living memory four years ago.

Paris bailed out Renault and PSA Peugeot Citroen in 2009 with low-interest loans, and had to intervene again in October with €7bn of guarantees for Peugeot in exchange for seats on the board, and reduced job cuts in France.

Peugeot has been losing €200m a month, chiefly because it remains focused on the home market, producing 40pc of its vehicles in French plants.

It is to shut down its Aulnay factory near Paris in 2014 and slash the workforce by 8,000, prompting a vituperative attack by the industrial revival minister Arnaud Montebourg for lack of "patriotism". Each redundancy costs almost €150,000.

Renault and Peugeot are scrambling to expand abroad but the neither is big enough to compete with giants such as Volkswagen. Annual output of 6m vehicles is deemed the minimum for economies of scale and long-term survival.

Julian Callow from Barclays Capital said France’s car industry has been choked slowly by a 15pc rise in unit labour costs against Germany since the launch of the euro.

While Berlin pushed through the Hartz IV labour reforms - and Volkswagen cut wages and lengthened hours - the French let costs creep up for year after year.

Eric Dor from the IESEG School of Business in Lille said France has clung too long to a high-tax dirigiste model - with state spending near 56pc of GDP - but has also made a hash of globalisation. "The Germans make top quality cars that export well to China and the BRICS while French cars are not fit for that market at all.

"There has been a huge difference in strategy. The Germans outsourced the low value-added parts to Eastern Europe, but continued to assemble the cars in Germany itself. When the French relocate to emerging markets, they shift the whole production, losing all the value-added and the jobs," he said.

The International Monetary Fund said France is losing global export share at an disturbing rate and is too reliant on "low to medium-tech products that face competition from emerging economies". It warned last month that the country risks slipping behind Spain and Italy as they grasp the nettle of reform.

Efforts to lure foreign investors have not been helped by threats to nationalise ArcelorMittal’s steel operations in Lorraine, a move described by the French business lobby MEDEF as "simply scandalous".

"We’re encouraging the French in the belief that they live on a different planet from the rest of the world," said the group’s president Laurence Parisot.

"The reindustrialisation of France is not possible without the confidence of investors, above all foreign investors. We must not let this scare them away," she said.

François Hollande backed down late last week with a compromise formula but the saga raises serious doubts about his willingness to play by market rules.

Mr Hollande has vowed to push through a package of reforms and business tax cuts proposed last month by industrialist Louis Gallois but there are concerns that he may lurch to the Left again as he reaches out to the French Communist Party to pass legislation in the senate.

Unilever’s chief executive Paul Polman compared France to North Korea and Cuba in a recent dispute over the closure of a tea plant.

"We want to continue investing in France but we have to able to adjust our production. For a society to stay alive and create jobs, it must be ready to adapt to a changing world and shut uncompetitive factories," he said.