Deflation Reversal in French Manufacturing: Navigating Opportunities and Risks in Energy and Resilient Sectors

The recent 0.2% month-over-month (MoM) increase in French Industrial Producer Prices (IPP) in May 2025 marks a critical turning point in a trajectory of deflation that has dominated European manufacturing since 2022. While energy-driven volatility continues to weigh on the sector, non-energy industries—from food processing to machinery—are emerging as anchors of resilience. This article dissects the underlying forces reshaping European manufacturing and identifies investment opportunities in sectors positioned to thrive amid shifting dynamics.

The Deflation Reversal: A Fragile Turnaround

The May 2025 IPP rebound (from April's sharp 3.9% MoM decline) reflects a stabilization in energy markets and sustained strength in non-energy sectors. Key data points underscore the divergence:

• Energy Sector: While prices for mining, quarrying, and energy fell 14.7% MoM in April, the May decline slowed to just 0.8%. This moderation, driven by stabilized electricity prices and reduced crude oil volatility, signals a floor under energy prices.
• Non-Energy Sectors: Manufacturing industries excluding energy grew 1.2% year-over-year (YoY) in May, with food and beverages (+0.2% MoM), transport equipment (+0.1% MoM), and machinery (+0.3% MoM) leading the way.

Forces Driving the Turnaround

1. Energy Market Stabilization:
2. Global oil prices have plateaued near $80/barrel since early 2025, reducing pressure on European energy importers.

3. EU's renewable energy transition has dampened demand for fossil fuels, while France's nuclear power resurgence (post-2024 maintenance) has eased electricity price spikes.

4. Non-Energy Pricing Power:

5. Food and Beverages: Processed food manufacturers (e.g., Danone, Lactalis) have maintained margins through cost pass-through and premium product launches.

6. Machinery: Demand for automation and energy-efficient equipment (e.g., Schneider Electric's smart grids) has bolstered pricing stability.

7. Structural Shifts in Demand:

8. Post-pandemic industrial recovery, while uneven, has boosted orders for durable goods.
9. EU's Green Deal subsidies are favoring firms investing in low-carbon manufacturing (e.g., wind turbine components).

Investment Implications: Where to Focus?

1. Energy-Efficient Manufacturing

• Opportunity: Companies reducing reliance on volatile commodities and adopting green technologies.
• Stock Pick:
• Case: Schneider Electric's smart energy solutions have grown 15% YoY in 2024, with margins expanding as energy prices stabilize.
• Theme: Invest in firms with:
• Exposure to renewable infrastructure (e.g., wind/solar components).
• High R&D spend on energy-efficient processes (e.g., Stellantis' EV battery partnerships).

2. Non-Energy Resilience Plays

• Food Processing: Stable demand and inflation pass-through are key.
• Stock Pick:
• Case: Danone's organic growth (+2.1% in Q1 2025) reflects premiumization trends, while its dairy supply chain resilience contrasts with energy-driven volatility.
• Machinery & Industrial Tech:
• Stock Pick:
• Case: Safran's diversification into hybrid propulsion systems (for both aerospace and marine markets) aligns with demand for low-emission solutions.

3. Caution Zones: Volatile Commodities and Overcapacity

• Energy-Heavy Sectors: Firms reliant on raw materials (e.g., steel, aluminum) face margin pressures from input cost swings.
• Avoid: ArcelorMittal (MT.AS) unless commodity prices rebound sustainably.
• Automotive: U.S. trade tariffs and oversupply in EV markets (e.g., Renault's Zoe) complicate profitability.

Modeling the Future: 2026 and Beyond

Forecasts suggest French IPP will trend upward to 130.37 by 2026, driven by:
- Energy: Stabilized at 10% below 2022 peaks, with renewables accounting for 40% of EU electricity by 2027.
- Non-Energy: Gradual growth to 1.8% YoY by 2026 as manufacturing rebounds.

However, risks remain:
- Geopolitical Risks: China's demand slowdown and U.S.-EU trade disputes could reignite deflation.
- Labor Costs: French wage growth (now 3.5% YoY) may outpace inflation, squeezing margins.

Conclusion: A Sectoral Play for Value

The French IPP rebound highlights a bifurcated manufacturing landscape: energy-driven sectors are stabilizing but not thriving, while non-energy industries are capturing pricing power. Investors should prioritize firms with:
- Low commodity exposure and high R&D in green tech.
- Pricing discipline in consumer staples and industrial equipment.

The path forward favors a “best-of-both-worlds” approach—leveraging energy resilience while betting on sectors insulated from volatility. For now, the deflation reversal is a fragile victory; selective investing is key to navigating this nuanced recovery.