France's Industrial Resurgence: A Sectoral Shift with Implications for European Equities

The French economy is undergoing a subtle yet significant transformation. While its service sector struggles to recover from a sharp contraction, the industrial sector has emerged as a pillar of resilience, driven by export momentum and stable demand. This divergence between sectors presents a critical opportunity for investors to capitalize on sector-specific momentum while navigating macroeconomic headwinds.

The Easing Downturn in Services
The French Services Purchasing Managers' Index (PMI) has been a barometer of the sector's fragility. After plummeting to 45.7 in November 2024—its lowest since March 2020—the Services PMI has trended upward, reaching an annual average of 52.9 in 2025 (per S&P Global projections). This recovery, however, remains uneven. Weak domestic demand and lingering trade tensions continue to weigh on sectors like hospitality and retail.

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While the Services sector is no longer in freefall, its growth remains subdued compared to its long-term average of 51.2 (2008–2024). Export orders, a key driver of past recoveries, have yet to rebound to pre-2024 levels, suggesting lingering headwinds from global trade disputes.

Industrial Confidence: Stability Amid Global Uncertainty
In contrast, France's industrial sector has shown remarkable resilience. The July 2025 Industrial Confidence Index (projected to remain above 100) reflects sustained demand for high-value exports such as automotive components, machinery, and aerospace products. Export-driven firms, particularly in automotive (e.g., Renault, Stellantis) and industrial engineering (e.g., Safran, Thales), are benefiting from strong global demand for advanced manufacturing.

The Manufacturing PMI, while not as volatile as its Services counterpart, has held steady near 50.5–51.0 since early 2025, signaling stable production. This stability is underpinned by robust export orders, with companies like Peugeot reporting increased sales in Asia and the U.S. despite trade barriers.

Macroeconomic Divergence: A Tale of Two Sectors
The INSEE's 0.6% GDP growth forecast for 2025 masks a stark divide. Services, which account for ~75% of France's economy, are growing at a tepid pace, while industrials—driven by exports—are outperforming. This divergence is structural:
- Services: Stagnant domestic consumption and weak tourism (post-pandemic recovery plateaued in 2024) are limiting growth.
- Industrials: Export-oriented firms are leveraging France's manufacturing prowess to capture global market share.

The result is a two-speed economy, with industrials acting as a stabilizer for the broader economy.

Investment Implications: Play the Sectoral Shift
Investors should position portfolios to exploit this divergence:

1. Long Industrial Equities/ETFs:
2. French Industrials ETFs (e.g., MSCI France Industrial ETF) offer broad exposure to firms like Renault, Airbus, and Schneider Electric.
3. Stock Picks:
   • Renault: Benefits from EV adoption and cost discipline.
   • Safran: Strong in aerospace and defense, with stable order books.

5. Caution on Domestic Consumer Stocks:

6. Avoid luxury (LVMH), retail (Carrefour), and hospitality (Accor) stocks, which rely on domestic demand. These sectors face headwinds from inflation, wage stagnation, and shifting consumer preferences.

7. Sector-Specific ETFs Over Broad Indices:

8. The CAC 40 Index may underperform as it is heavily weighted toward services and energy. Sector-specific plays offer better upside.

Risks and Considerations
- Trade Tensions: U.S. tariffs on French goods, particularly wine and luxury items, could dampen service-sector recovery but are less impactful on industrials.
- Energy Costs: While a risk, French manufacturers have better hedging strategies than service firms.

Conclusion
France's industrial recovery is a story of resilience amid macroeconomic headwinds. Investors should prioritize exposure to export-driven industrials while avoiding domestic consumer stocks. The data suggests a structural shift in sectoral momentum, with industrials leading the way toward a more balanced recovery. As the old adage goes: “Follow the factories, not the cafés.”

This analysis is for informational purposes only and not financial advice. Always conduct further research or consult a professional before making investment decisions.