French manufacturers suffer sharpest drop in new orders since January, PMI shows

France's manufacturing sector experienced a notable deterioration in July, with the HCOB Manufacturing PMI registering 48.2, remaining contractionary since January 2023. New orders saw their sharpest decline since January, and export sales hit a year-to-date low, indicating significant demand weakness. Despite a slight uptick in employment, the accelerating decline in order intakes, lengthening delivery times, and rising prices charged due to higher costs signal a challenging outlook, exacerbated by global trade tensions and domestic austerity measures.

Analysis

The French manufacturing sector displayed significant weakness at the start of the second half, with the HCOB Manufacturing PMI registering 48.2 in July. While a marginal increase from June's 48.1, the reading marks the seventh consecutive month of contraction and is a downward revision from the preliminary flash estimate of 48.8. The underlying data reveals a deteriorating outlook, primarily driven by an accelerating decline in new orders, which saw their sharpest drop since January. This weakness is broad-based, with new export sales falling to a year-to-date low, indicating faltering demand from both domestic and international markets. Despite this challenging environment, employment saw a minor increase, though recruitment focused on temporary staff, suggesting a lack of long-term business confidence. Furthermore, supply chains are under pressure, with delivery times lengthening at the most pronounced rate in two-and-a-half years. This, coupled with companies passing on higher cost burdens, led to a rise in prices charged for the first time in five months, signaling emerging stagflationary pressures.

Key Decisions for Investors

• Investors should exercise caution regarding exposure to French industrial and manufacturing equities, as the sharp contraction in new orders signals potential for negative earnings revisions.
• The data points to a challenging margin environment; it is prudent to assess the pricing power and cost structures of companies within the French manufacturing supply chain.
• The combination of falling demand and rising output prices suggests that broader European inflation data should be monitored closely, as it may influence ECB policy direction.
• Monitor upcoming Eurozone-wide PMI figures to determine if France's manufacturing weakness is an isolated issue or indicative of a wider regional economic slowdown, which would impact European asset allocation strategies.