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Data from HCOB reveals the French Services PMI for March at 47.9, up from 46.6 in preliminary results, indicating a slight improvement in business activity despite remaining in contraction territory. The Composite PMI stands at 48.0, compared to a prior figure of 45.1.
The report indicates that economic uncertainty and reduced demand continue to impact services negatively, even following a temporary boost from the Olympic Games in 2024. Input prices have returned to a disinflationary trend, with wage growth being a primary factor where costs have risen.
The outlook for the sector appears bleak, with both domestic and international orders declining. Although the rate of contraction in new orders has slowed, activity expectations for the upcoming year remain significantly below the long-term average, prompting companies to reduce their workforce.
Business Activity Shows Minor Resilience
What this essentially tells us is that firms operating in services within France are still facing a downturn, although the downturn isn’t quite as deep as originally expected. A reading below 50 in the Purchasing Managers’ Index implies contraction, meaning that business activity is still on the decline. However, the full-month figure being revised upward from the preliminary number shows that activity did not deteriorate as badly as previously reported. The slight improvement should be seen in context: while conditions may have become a touch less negative, they are still far from healthy or stable.
The Composite PMI, which blends manufacturing and services, gives us a decent overview of the broader private-sector climate, and that too appears stuck below the neutral 50 mark. It improved from 45.1 to 48.0, which is a fairly large jump in a short timeframe, but as it stands, we are still firmly within a shrinking economic environment. The services economy in particular, often driven by internal consumption and tourism-related activity, continues to feel the weight of low client confidence and weaker consumer demand.
Looking closer, the temporary uplift tied to preparations and activities linked to the upcoming Olympics has shown to have very limited staying power. Once that brief seasonal increase fell out of the data, underlying demand dynamics returned to being weak. There has been an improvement in input cost pressures, largely on account of lower inflation in certain areas and softer energy-related expenses. Nonetheless, the report points to wage costs as the key area where spending has picked up, which tends to happen when firms have to meet union obligations or address labour shortages selectively, albeit on a restrained scale.
Weaker Orders Reflect Lasting Uncertainty
New orders – both from within France and from abroad – are still declining. They are falling at a slower pace, yes, but that is more a sign of weakness levelling off rather than actual recovery starting. The softer contraction doesn’t suggest that clients have started returning, just that fewer are dropping away than before.
Expectations for the upcoming year remain lower than where they usually sit. That is where the clearest message lies. Firms simply do not see enough reason to ramp up activity or take on new staff. They are instead cutting back on employment, perhaps reluctantly, but doing so out of necessity and not caution. The outlook is therefore not about bracing for impact but rather managing through a period where demand is unlikely to provide enough support for further expansion.
Given this, we focus on how pricing will filter through. Input costs are still somewhat volatile and sensitive to wage changes, but output prices – what companies charge clients – are not likely to move much higher, as that would immediately hurt already-softening demand. This disinflationary trend may provide a useful baseline for adjustments in positioning. It also sharpens moves around rate expectations.
The shift in the rate of contraction signals that momentum is not overly negative, but still not pointing upward yet. Labour market actions – shedding rather than hiring – are tied closely to how forward orders look. That gives us a view into how risks are priced and which hedges are worth maintaining. Sentiment being low and output shrinking points to a probable path of recalibration rather than surprise.
The removal of temporary support from the Olympic boost leads to a more aligned view of the base economy. As such, any movement in credit spreads or movement in implied volatility in near-term contracts needs to be appraised with slower wage-transmission cycles and weaker order books in mind.
There are clearer signals now, and decisions must lean more on the hard data and less on seasonality or short-term boosts. Where we go next is less about downside surprises and more around methodically assessing recovery thresholds that aren’t yet in sight.
