French private sector slides into contraction in October on political jitters

• The flash services purchasing managers' index for France dropped to 48.4 in October, below the 50.7 market expectation.
• The prior reading for services stood at 51.2.
• October's flash manufacturing PMI registered 49.3, missing the anticipated 50.5.
• This compares with 50.6 in the previous month.
• The composite flash PMI, covering both sectors, was 48.4 against a forecast of 50.5.
• The composite index had been at 51.1 previously.

The return to contraction for France's private sector in October signals a worrying development, driven by political and financial worries. The drop in demand for French goods and services was the steepest since May, according to businesses surveyed, who blamed increased uncertainty and economic strains.

One potential bright spot for the ECB is that the survey's price measures fell compared with September, indicating a softening in both input cost and output charge inflation.

Examining the sector data, both manufacturers and service providers saw sharper demand decreases, with projects delayed as customers deferred decisions. At the same time, French companies became more negative about the next twelve months, as the future composite index hit its lowest point since April 2020. This marks the first time in nearly two years that corporate sentiment has turned negative. The gloomier outlook was frequently tied to the upcoming election year, with some firms also worried about public finances.

Turning to prices, composite-level data pointed to a moderation of inflation in France during October. The services sector was primarily responsible, as milder increases in input costs and output charges counterbalanced stronger price pressures in manufacturing.

Overall, today's PMI data at least aligns economic expectations with inflation pressures, as both softened slightly, potentially reducing expectations of ECB rate increases. However, this is just France, which already grapples with significant fiscal and economic challenges. Confirmation will require seeing how the PMI readings for Germany and other eurozone countries compare.