France’s industrial momentum is fading
The French economy is showing signs of losing industrial momentum as manufacturing output declines, suggesting that growth may not be as robust as previously thought. Per the full note from ing-think, manufacturing output fell by 1.0% in May, marking a concerning shift given that this sector has traditionally been a growth engine. As the automotive industry struggles with a 4.7% month-on-month decline, this deterioration could weigh on investor sentiment towards the euro. Without high-impact calendar events in the immediate future, traders should be cautious about holding long positions in EUR until further clarity on industrial performance emerges.
What the desk is arguing
The French industrial sector is clearly losing traction, with recent manufacturing data indicating a worrisome trend. Per the full note from ing-think, manufacturing output saw a month-on-month decline of 1.0% in May, following a modest upward revision of 0.6% in April. This shift not only reflects internal challenges but also suggests broader economic implications given the sector's role in driving growth.
The evidence is alarming across various industrial segments. Weakness was not restricted to just automotive, which plunged 4.7% month-on-month and 7.2% year-on-year, but also in other sectors such as electrical and electronic equipment where production fell by 2.3%. While the energy sector provided some relief, the pervasive downward movement raises questions about the resilience of the French economy.
Where it sits in our coverage
Currently, our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12 as calculated from our internal data. Target figures from leading firms suggest the following: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with the broader market view that places a focus on the euro's vulnerability amidst industrial downturns. Notably, any adjustment could reflect positioning shifts that traders should monitor closely.
How other firms see it
Majority opinion appears to align with the notion of a weakening euro, with firms like jpmorgan and others expressing caution on the EUR amidst these industrial challenges. Conversely, bofa takes a contrary stance, suggesting that the euro might find strength despite these ongoing concerns.
Traders should particularly keep an eye on the EURO/USD currency pair as manufacturing data continues to unfold. The impact of central bank policies, particularly from the ECB, may also shape sentiment moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01French manufacturing output declined by 1.0% in May, indicating a loss of industrial momentum.
- 02The automotive sector remains under pressure with a 4.7% decrease month-on-month.
- 03The overall weak industrial performance is raising concerns about the health of the French economy.
- 04Traders should be cautious with EUR positions ahead of further economic data releases.
Market implications
Watch for any resistance around the 1.08 level in EUR/USD, as this downturn in industrial output may shift market sentiment. Positioning ahead of any future data releases may reflect growing concerns.
Risks to this view
A rebound in industrial output or stronger-than-expected economic data could reverse current trends and support the euro. Additionally, significant policy changes from the ECB could also provide unexpected support.
Articles France’s industrial momentum is fading 08:57 France Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Industry, the main engine of French growth, is losing steam while other growth drivers remain stalled Charlotte de Montpellier Manufacturing output declines In recent months, the French economy has displayed a degree of duality. While weak household sentiment has weighed on the services sector and domestic demand, industry has performed much better, supported by strong external demand and a highly favourable sectoral mix. However, the data released today suggests that the main engine of the French economy is beginning to lose momentum.
Manufacturing output fell sharply in May, declining by 1.0% month-on-month after a 0.6% increase in April (revised upwards). The downturn was broad-based across sectors. Part of the decline, however, particularly in the production of transport equipment excluding motor vehicles, is not especially concerning.
Aircraft and shipbuilding output is inherently volatile given the size and complexity of the products involved. Although production in this segment declined by 2.0% in May, it remains more than 20% higher year-on-year. By contrast, the continued weakness in the automotive sector is more troubling.
Vehicle production fell by 4.7% month-on-month in May and was 7.2% lower than a year earlier, providing further evidence of the challenges facing the European automotive industry. Industrial production also declined in electrical, electronic and computer equipment manufacturing (-2.3% after +1.4% in April), in other industrial goods such as metals, chemicals and pharmaceuticals (-0.4% after +0.1%), and in the food and beverage industry (-0.3% after being flat in April). A strong rebound in gas and electricity production helped cushion the overall decline, leaving total industrial output down by only 0.1%, a smaller drop than that recorded in manufacturing.
Overall, French industry appears to be losing momentum, although manufacturing output remains 2.2% higher than a year ago. Meanwhile, construction output rebounded by 1.2%. French growth lacks a clear engine Looking ahead, June business survey data points to slower, though still positive, industrial production growth in the coming months.
Some temporary factors that previously supported French industry, notably production disruptions among certain Asian competitors, are likely to fade as tensions in the Middle East ease. Other factors should continue to support activity, however, including strong demand in aerospace and rising defence spending, which particularly benefits the roughly 5% of French industry linked to defence manufacturing. Overall, French industry is expected to continue outperforming the services sector, albeit with less momentum than at the start of the year.
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