At the start of 2025, the French economy suffered from a continued contraction in economic activity in the private sector, recording a decline in output levels for five consecutive months. This contraction reflects the ongoing economic challenges facing the largest eurozone economy as it enters a new year. Despite this ongoing contraction, there are some signs that the pace of decline is weakening, giving hope for a possible improvement in the economic situation in the coming period.
Key PMI Data
According to the preliminary PMI data collected between January 9 and 22, 2025, the French Composite Output Index for Purchasing Managers (HCOB Flash) came in at 48.3, its highest level in four months compared to 47.5 in December 2024. Although the figure is still below the 50.0 level, which indicates contraction, this slight improvement shows that the decline in economic activity is starting to slow.
Private sector decline
Economic activity in the French private sector declined, driven mainly by the services sector, which recorded a slight decline of 48.9 in January compared to 49.3 in December. In contrast, the manufacturing sector saw a relative improvement, with the output index in this sector recording 45.0, its highest level in seven months, reflecting some progress in the recovery of industrial production.
Despite this slight increase, demand in both sectors remains weak, with companies continuing to report declines in new orders for the eighth consecutive month. While the pace of decline in these orders was slower than in previous months, weak demand across sectors is one of the main factors restraining growth in the French economy.
Inflationary pressures and employment
Despite the relative decline in prices in some sectors, inflationary pressures remain on the French economy, with input costs in the services sector hitting their highest level since last August. These pressures reflected higher wage costs, which are the main reason for this increase in costs. Despite these increases, companies couldn’t pass these costs on to customers. Companies cut prices for the first time in four years, reflecting the intense competition in the market and their efforts to ease the burden on consumers.
In terms of employment, French companies reported rapid job losses, recording the fastest rate of layoffs since October 2020. This was attributed to the slowdown in production and increased cost pressures, which prompted companies to take measures to reduce expenses.
Forward-looking index
Looking ahead, the PMI showed that French companies showed a neutral outlook for economic activity over the next 12 months. However, compared to a more optimistic outlook at the end of 2024, this reflects a deterioration in sentiment due to concerns about political and economic instability. Political uncertainty, including challenges related to the 2025 budget, is among the main reasons for concern in French markets.
Economic Comments
Commenting on the latest data, Dr. Tariq Kamal Chowdhury, Economist at Commerzbank Hamburg, said: “The preliminary PMI indicates a continued economic contraction in France. Despite a slight improvement in the manufacturing sector, the overall situation remains worrying. The political crisis remains a major factor affecting the stability of the French economy, with tensions over the budget and economic reforms rising.”
Regarding the industrial sector, he added: “The decline in new orders, both domestically and internationally, is weighing heavily on companies’ performance. However, companies in France remain hopeful that conditions will improve in the coming months if some political stability is achieved.
The industrial and services sector in the French economy
The industrial and service sectors are an essential part of the French economy, but they face ongoing challenges in the current economic climate. While the industrial sector is suffering from declining demand and increasing inflationary pressures, the service sector is also facing a number of problems that limit its growth.
Industrial sector
The French industrial sector faced difficulties at the beginning of 2025. Despite a slight improvement in the Purchasing Managers Index, which recorded an increase in production, the improvement remained limited. The data showed that new orders continued to decline, both domestically and internationally. A combination of factors, most notably global economic challenges, high inflation, and increased production costs, has caused this decline in demand.
In addition, industrial companies continued to face inflationary pressures on inputs, as raw material prices rose, affecting profit margins. Although this increase was lower than long-term rates, many companies were unable to pass these costs on to customers. As a result, output prices were reduced, indicating a slowdown in industrial activity in general.
In terms of employment, industrial companies showed a decline in the number of workers. This is attributed to weak demand for industrial products, which has led companies to reduce their workforce to reduce costs. As this trend continues, the near future does not look promising for this sector.
Service Sector
In the service sector, the situation was very similar. The data showed a decline in service activity, with a continued decline in demand for services provided by companies in this sector. The services PMI also showed a slight decline, as companies complained about weak domestic and international demand for their services. However, the pace of this decline was less than the previous month, which may indicate some slight improvement in economic conditions.