UPDATE 1-French business activity shrinks again, but pace slows

Thu Jan 23, 2014 4:32am EST

Related Topics

* Hollande seeking to revive corporate France with tax break

* Surveys painting mixed picture of companies' health

By Leigh Thomas

PARIS, Jan 23 (Reuters) - French business activity shrank again in January, albeit at a slower pace than expected, a monthly survey showed on Thursday, adding to government pressure to revive the struggling corporate sector.

With business recovering in much of Europe, the French corporate sector's weak performance increasingly stands out, a situation President Francois Hollande hopes to turn around with new plans to cut the cost of labour in exchange for hiring and investing in France.

Data compiler Markit said its composite purchasing managers' index rose in January to a three-month high of 48.5 from 47.3 in December. It remained below the 50-point threshold separating expansions in activity from contractions.

"Companies are worried about the outlook," Markit chief economist Chris Williamson said.

"They're worried about the political situation, about the lack of proper reforms and just how the French government is going to bring about a recovery in the economy," he added.

Markit's index for the services sector rose to 48.6 from 47.8 in December, beating economists' average expectation for an increase to only 48.1.

In the manufacturing sector, the index rose to 48.8 from 47.0 in December, also beating the average expectation for a reading of 47.5.

ROAD TO RECOVERY?

Other business confidence indicators suggest that the euro zone's second-biggest economy may be stronger than indicated by the closely watched PMI data

A survey from the INSEE official statistics agency found that industry morale was stable in January in line with expectations and at its long-term average.

Overall business morale was also stable although it still has ground to recover before returning to its long-term average, the survey showed.

The PMI data indicated that the flow of new business and orders declined at a slower pace this month as companies reported that they benefited from product launches and being more aggressive about seizing opportunities, Markit said.

In a sign that demand from abroad rather than at home is helping activity, manufacturers saw the flow of new orders for export rise this month, returning to growth for the first time in three months, although at a weak rate.

Companies also cut their prices faster as they struggled to remain competitive, squeezing their margins and adding to pressure to reduce staff, Markit said.

"What the survey data are showing is that the lack of competitiveness in France and the need for structural reform is keeping its growth rate down," Williamson said, adding that the PMI data suggested the economy started the year in a slight contraction.

Facing weak ratings in the face of stubbornly high unemployment, Hollande called for a pro-business shift in policy last week and unveiled plans to cut France's high cost of labour by 30 billion euros ($41 billion) by phasing out charges that firms pay to finance family benefits.

Though businesses welcomed the idea of cutting labour costs, they are wary of Hollande's plans to tie the tax break to meeting new targets on hiring and investing in France.

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