French services sector contraction continues in December, PMI shows

AI Sentiment: Bearish
Reason: The French services sector is experiencing contraction due to the impact of COVID-19 restrictions and inflation pressures, with December marking the second consecutive month of contraction. However, business confidence remains relatively high.

The services sector in France continued to contract in December, according to the latest Purchasing Managers' Index (PMI) data. This marks the second consecutive month of contraction, following the restrictions imposed to curb the spread of the Omicron variant of COVID-19.

The IHS Markit France Services PMI registered a fall to 48.3 in December, down from 54.9 in November. A reading below 50 indicates a contraction in the sector. The figure was lower than market expectations, which predicted a modest fall to 53.0. This is the first back-to-back contraction in the French services sector since the height of the first wave of the pandemic in May and June 2020.

Additionally, the IHS Markit France Composite Output Index, which includes both manufacturing and services, fell to 48.5 in December from 55.1 in November. This sharp fall was mainly due to the contraction in the services sector, as the manufacturing sector continued to expand, albeit at a slower pace.

This contraction in the French services sector comes amidst a new wave of COVID-19 cases across Europe, driven by the Omicron variant. France, like many other European countries, has imposed new restrictions to curb the spread of the virus, impacting businesses in the services sector, including restaurants, bars, and entertainment venues.

Despite the contraction, business confidence in the French services sector remains relatively high, with firms optimistic about the outlook for the next 12 months. This optimism is underpinned by hopes of an easing of COVID-19 restrictions and a recovery in demand in the coming months.

However, inflationary pressures continue to pose a challenge. Input costs and output prices in the French services sector increased at a rapid pace in December, driven by higher wage costs and supplier price increases. This could potentially impact profit margins and weigh on the recovery of the sector.

The contraction in the French services sector underscores the challenges facing the European economy as it grapples with the impact of the Omicron variant and ongoing inflationary pressures. Decisive policy action will be needed to support businesses and ensure a robust recovery in the year ahead.