The October flash composite PMI fell to 48.4 from 51.1, well below forecasts, and business confidence sank to its lowest since 2012 outside the pandemic. French 10-year yields sit above 5.1% after the spread to German debt widened about 17 basis points on Thursday.
France's private sector shrank in October, according to survey data released Friday, hours before Moody's Ratings is scheduled to publish its review of the country's credit rating.
The flash France composite purchasing managers' index compiled by S&P Global fell to 48.4 from 51.1 in September. Readings below 50 indicate contraction. Economists had expected 50.5. The services index dropped to 48.4 from 51.2, against a forecast of 50.7, and the manufacturing index fell to 49.3 from 50.6. S&P Global said demand declined at the sharpest rate since May and that business confidence hit its lowest level since 2012 if the pandemic period is excluded. French employment fell.
Growth and borrowing costs moving apart
The survey lands on top of a sharp move in France's bond market. The yield on 10-year French government bonds closed Thursday at about 5.13%, and the gap over comparable German Bunds widened by about 17 basis points to roughly 175 basis points, according to central bank data. French borrowing costs are at levels not seen since 2002.
That is the core of the problem. A rating agency judging a sovereign borrower looks at debt dynamics, and those depend on growth as much as on spending. A contracting economy collects less tax, which makes deficit targets harder to hit. The government projects a deficit of 5.4% of gross domestic product for 2026.
Moody's rates France Aa3 with a negative outlook, assigned in April. S&P Global Ratings and Fitch Ratings both rate the country A+. Moody's decision is expected after European markets close on Friday. Some French economists quoted in local press expect a one-notch downgrade, which would take the rating to A1, the equivalent of the other two agencies' grades.
Contained to France, so far
The weakness was concentrated in France. The euro-area composite PMI fell to 51.9 from 53.1, below the 52.7 expected but still signaling growth for a fourth month. Germany's composite slipped to 52.8 from 53.8, and German employers kept hiring while French ones cut. S&P Global described renewed weakness in French services as a key drag on the bloc and noted that strikes and unrest may account for some of it.
There were inflation signals in the data as well. Euro-area manufacturers reported input prices rising at the steepest rate since May. In France, goods producers raised prices by the most since May even as services inflation eased.
The euro slipped 0.3% to just below $1.12 early Friday.
Loop or blip
One view is that France has entered a loop in which contraction, collapsing confidence and 5%-plus borrowing costs reinforce each other, so a downgrade would confirm what the spread already says rather than surprise anyone.
The other is that part of the shock is temporary and much of it is priced. Strikes can distort a single month of survey data, the rest of the euro area is still growing, and a cut to A1 would merely bring Moody's in line with its peers.
What to watch
Moody's decision after the European close on Friday, French bond yields at Friday's close and Monday's open, and the European Central Bank's meeting on Oct. 29.