French Manufacturing Shows Fragile Signs of Recovery in April 2025 Amid Global Uncertainties

The French manufacturing sector posted its first output increase in nearly three years in April 2025, with the Purchasing Managers’ Index (PMI) rising to 48.7, marking the highest level since January 2023. While the figure remains below the 50-expansion threshold, this uptick signals a tentative stabilization after prolonged contraction. The improvement was driven by reduced contraction in domestic and export orders, modest gains in consumer goods production, and optimism around defense spending. However, persistent headwinds—including U.S. tariffs, weak global demand, and employment cuts—highlight the fragility of this recovery.

Key Drivers of the Modest Recovery

1. Defense Spending Expectations:
   Anticipated increases in European defense budgets, particularly in France, provided a critical tailwind. Sectors linked to military equipment, such as aerospace and electronics, saw improved business conditions. This aligns with France’s commitment to raising defense spending to 2% of GDP, potentially boosting orders for companies like Thales and Safran.

2. Lower Input Costs:
   Declining energy prices (e.g., oil, natural gas) eased input cost pressures, with factory gate prices falling for the second consecutive month. This relief, coupled with the European Central Bank’s (ECB) accommodative monetary policy, reduced operational burdens for manufacturers.

3. Reduced Order Contractions:
   New orders from domestic and foreign clients shrank at the slowest pace in over two years, signaling stabilization in demand. Consumer goods producers, such as food and beverage manufacturers, led this improvement, while intermediate and investment goods sectors hovered near contraction.

Persistent Challenges

1. U.S. Tariffs and Global Trade Uncertainty:
   The sector remains vulnerable to U.S. tariff disputes, which continue to disrupt supply chains and weigh on export orders. New export orders fell sharply to 43.1%, reflecting reduced demand from key markets like the EU and China.

2. Employment Cuts:
   Manufacturers reduced staffing levels for the 14th consecutive month, though at a slower pace. Companies relied on attrition rather than layoffs, highlighting cautious cost management.

3. Weak External Demand:
   Backlogs of orders contracted further, and imports declined, indicating lingering demand challenges. The ECB’s efforts to streamline regulations and boost investment have yet to translate into sustained growth.

Sectoral Performance

• Consumer Goods: Improved for the second month in a row, driven by stabilized domestic demand and reduced cost pressures.
• Intermediate Goods: Remained marginally below 50, with no significant shifts.
• Investment Goods: Stagnant, reflecting weak capital expenditure globally.

Investment Implications

The April PMI data suggests cautious optimism for French manufacturing but underscores the sector’s vulnerability to external shocks. Investors should consider:
1. Defense and Aerospace Sectors: Companies benefiting from defense spending, such as Thales and Safran, may outperform as governments prioritize military modernization.
2. Energy-Sensitive Industries: Lower energy costs could improve margins for sectors like chemicals and plastics.
3. Global Trade Risks: Portfolios exposed to export-reliant industries (e.g., automotive, electronics) should be hedged against tariff-related volatility.

Conclusion

The April 2025 PMI rise to 48.7 marks a critical turning point for French manufacturing, though the sector remains in contraction. While defense spending and reduced cost pressures offer hope, the path to sustained recovery hinges on resolving trade disputes and boosting global demand. With 41% of manufacturing GDP still contracting and employment cuts persisting, investors should balance exposure to resilient sectors like defense with caution toward export-heavy industries. The ECB’s supportive policies and lower energy costs provide a foundation for growth, but the road to pre-pandemic levels will be uneven, requiring close monitoring of trade policies and geopolitical risks.

Data Sources: S&P Global, ISM, ecb Quarterly Reports