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French industrial sentiment falls to 3-year low

The souring perspective for France’s economy comes ahead of an expected wave of steep tax hikes and amid a national debate over how to cure France’s declining international competitiveness.

“The slide in confidence by business leaders is beginning to get serious,” said Helene Baudchon, BNP Paribas analyst.

INSEE has forecasted that France will show zero-growth in the fourth quarter of 2012, but Michel Martinez of Societe Generale said Tuesday’s data could mean France will instead enter a “mild recession” at the end of the year.

The composite industrial sentiment index dropped five points from last month to 85 points in October, moving further from its long-term average of 100 points.

The composite business sentiment indicator, which also includes services, construction and wholesale and retail sales, dropped by one point over the month to also hit 85 points.

A small gain in the retail sector was outweighed by a dip in the services sector and the plunge in industrial sentiment.

The poor outlook comes as the French parliament debates the 2013 budget which will likely include 20 billion euros ($26 billion) in tax hikes, including ten billion euros for businesses.

To counter the expanding tax bill, business leaders and some economists are hoping for an ambitious push to boost France’s slumping competitiveness by cutting social welfare charges paid by companies.

A government-ordered study by former EADS chairman Louis Gallois to be unveiled on November 5 is expected to urge that social welfare charges paid by companies be cut by 30 billion euros ($39 billion) in the next two to three years.

Financing France’s social programmes could then be transferred to sales or income taxes, though that would be a highly controversial decision by the Socialist government.

Gallois has already sparked union outrage by saying that France needed a competitiveness “shock” to turn its economy around.

In their data, INSEE said the managers of industrial companies surveyed “characterised their past activity as very weak” and “were also pessimistic, but in a less pronounced manner, about their own perspectives in the coming three months.”

French manufacturers’ outlook about their sector also continued to worsen, while they considered their order books to be “depleted”.Â

At the worst of the global financial crisis the French industrial sentiment index fell to 69 points in March 2009.