France Faces Prolonged Stagnation

France remains the Eurozone’s Achilles heel, as its economy stagnates. Estimates continue to show that the euro area ex-France is doing significantly better. Today’s flash Markit PMI report for June showed French manufacturing and service sectors contracting faster than expected. Manufacturing orders were particularly poor. 
 

PMI below 50 indicates contraction (source: Investing.com)

Markit: – There remained little sign of any turnaround in the performance of France’s economy at the end of Q2, with output falling for a second successive month and at a faster rate. The data are consistent with another disappointing GDP outturn for Q2 following stagnation in the first quarter… On these trends, the economic underperformance of France seems set to persist well into H2 2014.

A number of factors contributed to this weakness, including elevated political uncertainty in France. Here are some other problems that continue to plague the nation: 

1. The unemployed in France now number 3.4 million, over 10% of the workforce. And the long-term unemployment rate is still rising.
 

2. French residential construction is mired in red tape, which discourages homebuilding. As a result, the nation’s home affordability is worse than in the UK, a nation that is struggling with expensive real estate. With weak construction activity and tepid housing market, the French housing sector continues to put downward pressure on the GDP growth. 

Reuters: – Strangled by regulation and high prices, weak French housing investment is proving a major drag on the euro zone’s second-biggest economy as it struggles to stage a convincing recovery.
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President Francois Hollande pledged more than a year ago to slash red tape holding back construction, hoping to bring within reach an oft-repeated promise to build 500,000 new homes a year. 

But property developers complain that government measures since then have even discouraged home building and say they simply cannot make houses at prices would-be buyers can afford. 
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Figures from the OECD suggest prices relative to household income are now less affordable in France than in Britain, where the central bank has warned of a potential housing bubble.