French Firms Cut Jobs as Austerity Squeezes the Eurozone

French businesses cut staff for the sixth month running in October, mostly by leaving vacant positions unfilled and letting temporary contracts expire. The people who lose first in a downturn are the ones on short contracts, and the survey says exactly where the cuts fell.

France's composite purchasing managers' index (PMI) dropped to 48.4 from 51.1 in September, well below the 50.5 economists had forecast. Anything under 50 signals contraction. The services index fell to 48.4. Manufacturing slipped to 49.3, its lowest in 11 months. New orders fell at their fastest pace since May, and export business declined for an eleventh consecutive month. France had returned to growth in September after months of contraction. The recovery lasted a single month.

Across the eurozone, the composite PMI fell to 51.9 from 53.1 in September, the weakest reading in four months. Economists had expected 52.7. The index remains above 50.

Who Absorbs the Cost

The labour market is where the squeeze lands. French firms reported that customers were postponing projects and delaying spending decisions. Companies responded by cutting headcount through attrition and by not renewing temporary work. Temporary contract workers carry the adjustment, and they leave without a redundancy process.

Germany's services sector told a similar story. Companies there reported that customers were delaying decisions and holding back spending as budgets tightened. The services index fell to 51.7. Phil Smith, economics associate director at S&P Global Market Intelligence, said the slowdown "underscored that the recovery in the eurozone's largest economy remains fragile."

Credit, Rates and the Bond Market

The French 10-year government bond yield reached 5.14% on Thursday, its highest in 24 years, before easing to around 5.04% on Friday. The gap with German 10-year yields stood 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.

Rory Fennessy, senior economist at Oxford Economics, said the volatile political situation and the spike in government borrowing costs weighed on the French PMI. Higher rates make loans more expensive for businesses and can discourage investment, even without further European Central Bank (ECB) rate increases.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said "higher interest rates are also starting to take a toll, dampening demand." With inflation stubborn, he said, the figures "will likely add to further speculation of more aggressive policy tightening from the ECB." The ECB must now decide how much further it can raise borrowing costs without damaging growth.

Defence Spending Props Up German Industry

Germany's manufacturing PMI rose to 54.2, its highest in two months. The survey credits export orders and government spending on defence and infrastructure. While service firms reported customers holding back and budgets tightening, state money for defence helped lift the one sector that grew faster.

German manufacturers also reported the fastest increase in input costs since May, particularly for oil, raw materials and electronic components. Brent crude was trading near $114 a barrel on Friday. Manufacturer confidence fell to its lowest since July. Across the eurozone, firms reported higher prices for energy, fuel and transport, and supplier delivery times lengthened by the most in four months.

Confidence Falls to Pandemic Lows

French business expectations for the next 12 months fell to their lowest level since April 2020, six years ago, when the pandemic had halted much of the economy. Expectations turned negative for the first time in almost two years.

Joe Hayes, senior principal economist at S&P Global Market Intelligence, linked the reading to concerns about "what is shaping up to be a highly uncertain 2027 Presidential Election, compounding pre-existing worries about France's fiscal situation."

France's CAC 40 fell 0.7% on Friday morning to around 7,750 points, more than 11% below its 10 August closing high. Italy's FTSE MIB is down more than 10% from its August peak. The euro traded near $1.12, more than 4% below its August high, which can make imported energy dearer.

The survey does not point to recession. Williamson said it still indicates quarterly GDP growth of around 0.3%.