Sentiment in French manufacturing deteriorated surprisingly sharply in August. At 96, the headline index was down fully 5 points versus its marginally stronger revised July mark to match its lowest level since December 2020. This was the steepest drop since April 2020, just after the arrival of Covid, and only the second reading below the 100 long-run average since March 2021.

The August slump reflected a hefty fall in past output (minus 5 percent after 9 percent) and a renewed decline in order books (minus 21 percent after minus 15 percent). Personal production expectations also worsened with general production expectations flat. Expected selling prices (3 percent after 7 percent) eased back below their historic norm (4 percent).

Elsewhere, sentiment generally deteriorated too, albeit much less markedly. Hence, it was lower in both services (100 after 102) and in retail trade (105 after 106) but slightly stronger in construction (106 after 105). As a result, the economy-wide index dipped a point to 99.

Today's update suggests that French manufacturing had a particularly poor August, consistent with yesterday's weak flash sector PMI (46.4). It also warns that economic growth in general is slowing. However, at 1 and minus 4 respectively, the French ECDI and ECDI-P both show overall economic activity running broadly in line with market expectations.

The headline index is expected to dip below its long-run average to 99.

INSEE is France's National Institute of Statistics and Economic Studies. INSEE's business climate indicator aims to summarise the mood of French business leaders. The survey asks questions about output, orders and inventories and expectations for future business. These are synthesised into an overall index of sentiment, adjusted so that the long-run average is 100. The main focus is the manufacturing sector but the survey also provides separate confidence measures for construction, retail trade and services on a monthly basis and for wholesale trade every other month.

If you are looking for clues on French business sentiment, this survey would be a good starting point. The indicator is based on a survey that asks business leaders about their expectations for new orders and their overall impressions of the economy. The results are a diffusion index that reflects the difference between positive and negative responses as a percentage of the total number of answers.