French Firms Shrink, ECB Eyes Rate Hikes, Workers Pay

French businesses cut staff for the sixth month running in October, mostly by leaving vacant posts unfilled and letting temporary contracts expire. That's how the French economy sheds people: quietly, without a headline, one expired contract at a time. The figure comes from the latest purchasing managers' survey, which also found French business confidence at its lowest since the first Covid-19 lockdowns six years ago.

France's composite PMI dropped to 48.4 from 51.1 in September. Economists had forecast 50.5. The services index fell to 48.4, manufacturing slipped to 49.3, its lowest in 11 months. Customers are postponing projects and delaying spending. New orders fell at their fastest pace since May. Export business shrank for an eleventh consecutive month. France's return to growth in September lasted exactly one month.

The Bond Market Votes, Nobody Else Does

The French 10-year government bond yield hit 5.14% on Thursday, its highest in 24 years, before easing to around 5.04% on Friday. The gap with German yields stands at 170 basis points, more than double the 78 recorded in early August. France now pays around 45 basis points more than Italy to borrow for ten years. The CAC 40 sits more than 11% below its 10 August high; Italy's FTSE MIB is down more than 10% from its August peak.

Joe Hayes, senior principal economist at S&P Global Market Intelligence, tied the gloom to what he called "a highly uncertain 2027 Presidential Election, compounding pre-existing worries about France's fiscal situation." Read that again. The next electoral circus is already pricing risk into corporate decisions, and the verdict on French politics is being delivered by lenders. Rory Fennessy of Oxford Economics said the "volatile political situation and spike in government borrowing costs" weighed on the overall picture.

Brussels, Frankfurt and the Rate Lever

The eurozone composite PMI fell to 51.9 from 53.1, a four-month low, against an expected 52.7. Chris Williamson, chief business economist at S&P Global Market Intelligence, said "higher interest rates are also starting to take a toll, dampening demand," and that the figures "will likely add to further speculation of more aggressive policy tightening from the ECB."

The tool being sharpened is the interest rate. It makes loans dearer, discourages investment, and squeezes everyone downstream, from the shop that can't refinance to the temp whose contract isn't renewed. The ECB, an institution no one on the receiving end elected, now weighs how much more borrowing costs can rise to contain inflation without, as the survey puts it, causing more damage to growth. The survey still points to quarterly GDP growth of around 0.3%. It doesn't yet suggest recession.

Guns and Pipelines Keep the Books Warm

Germany's picture is brighter on paper. Its composite PMI eased to 52.8 from 53.8. Manufacturing rose to 54.2, supported by export orders and government spending on defence and infrastructure. Public money for defence is holding up German factory floors while services weaken, with customers holding back spending as budgets tighten.

German manufacturers reported the fastest rise in input costs since May, particularly oil, raw materials and electronic components. Brent crude traded near $114 a barrel on Friday. Across the eurozone, manufacturers reported higher prices for energy, fuel and transport, and supplier delivery times lengthened by the most in four months. The euro, near $1.12, is more than 4% below its August high, which can make imported energy dearer still.

Who Absorbs the Shock

The survey speaks in indices and basis points. The people inside those numbers are the ones whose posts go unfilled and whose contracts quietly lapse. Phil Smith of S&P Global Market Intelligence warned that the German recovery "remains fragile." Fragile for whom, the report doesn't say. The answer sits in the French hiring figures: staff cuts, six months running, with no one needing to be fired.