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French PMIs signal Q1 recession - Analyst

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02/21/2013 | 02:10pm CEST

French PMIs out today show manufacturing down to 43.6 and services down to 42, that's a worrying sign for the euro zone as the bloc's second-largest economy slides towards recession, says RBC Capital Markets' James Ashley.



(QUESTION: James, we've just had the French PMIs out and manufacturing down to 43.6, services down to 42.7, and the comps are obviously lower too, all down in the month, all lower than expected. What's your reaction?)
Clearly, a major concern. I mean, it's worth remembering that the PMIs have overstated to the extent of the French weakness in the past couple of quarters so we wouldn't necessarily take the PMIs at face value but nonetheless, very much consistent with the French economy probably heading into a recession in the first quarter and from a Euro perspective, that's clearly a major concern that the second largest economy is probably going into recession so-
(QUESTION: Well, I'm just going to ask, is France, in your eyes, still core or can we say is it core no more?)
No, I still think it's core. I think it's got relatively strong fundamentals but there's no doubt that there are major structural challenges and cyclically it is in a very weak position. I think when we think the latest commission forecast tomorrow, we'll see a significant downgrade and the French Government's forecast for growth of 0.8% this year looks ever more optimistic in our view.
(QUESTION: Indeed. And of course, we've got French bond auctions later today. They're selling EUR10 billion. I wonder how investors will show up for that. Let's move on to Germany. The manufacturing PMI expected to expand over 50 for the first time in a year. If Germany does start growing again, is it strong enough, is it big enough to be able to carry the Eurozone on its back all by itself?)
No, not by itself, it's not. I mean, let's be clear. Germany in terms of its domestic fundamentals is very strong. It's got strong labor market, it's got strong fiscal position. There are no major imbalances in the German economy so it is in solid shape but it is an export-dependent economy. It is an economy which is going to be affected by sentiment towards what's going on in the rest of Europe. And although Germany can in and of itself do a reasonable job in terms of trying to drag the Euro area out of recession, if the rest of the Eurozone is in a bit of a mess, then it's not going to be strong enough in itself to engineer a recovery.
(QUESTION: I want to ask you about these market moves that we touched on. Obviously the minutes from the Fed, pretty downbeat in a sense that it might tighten sooner than expected. If these markets do start to unravel, stocks come down, what will the effect of that be on the European recovery?)
Well, I mean, we saw the first effect straight away yesterday when markets latched on to the idea that the QE3 program might not continue indefinitely as had been expected. We saw immediate reaction in Euro-Dollar, which it had sent pretty much straight away. And obviously from a European perspective, that has implications in terms of exports, in terms of inflation, and there's no doubt whatsoever that it will also have an impact in terms of fixed income market so there's no question at all that the policies of the ECB and the Fed are linked. They obviously are assessing policy independently over each other but they cannot operate in a bubble. They have to be mindful of what one is doing will have consequences for the other.
(QUESTION: Of course, a lower Euro is essentially pretty good for the Eurozone.)
Absolutely. I mean, you look at what the President Draghi said in the last month's press conference, I think part of that was targeted at the strengthening of the Euro so I think first order, the ECB will be quite pleased to see the Euro showing some signs of weakness.'

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