France’s manufacturing PMI for July was revised down to 48.2 from a preliminary 48.4, indicating ongoing challenges in the sector. New factory orders experienced their steepest decline since January, reflecting a tough domestic and export market environment. Business confidence has also fallen to its lowest since February.
Worsening Economic Outlook
The economic outlook for France’s manufacturing sector appears to have worsened at the start of the year’s second half. Although there were modest recovery signs in the first half, the recent data reveals a slowdown. The rise in the headline manufacturing index is dampened by a decline in order intakes and deteriorating business expectations.
Optimism for an economic turnaround in 2025 contrasts with the downturn in orders and expectations. Recent EU regulatory easing and interest rate cuts were expected to boost industrial activity. However, political uncertainty and global trade tensions are undermining investment, leading to potential order cancellations.
Delivery times have lengthened significantly due to labour shortages, goods scarcity, and strikes. Supply chains are likely to adjust structurally amid new tariffs and strategic firm shifts. The EU-US 15 percent tariff agreement might provide some planning certainty, though concerns remain about its durability given the unpredictability of US trade policy.
The final July manufacturing numbers from France confirm a clear slowdown is underway. Hopes for a second-half recovery are now in doubt, especially with new orders declining at the fastest rate we have seen since the beginning of the year. We should therefore consider positioning for further weakness in French equities by buying put options on the CAC 40 index.
Economic and Political Challenges
This manufacturing weakness is happening while inflation remains uncomfortably high, creating a difficult environment. The latest inflation data we saw for the Eurozone in July 2025 came in at 2.8%, still significantly above the central bank’s target and limiting its ability to act. This combination of slowing growth and persistent inflation reinforces the need for caution and makes defensive strategies more attractive.
The political situation in France, with the government’s new austerity agenda, is directly impacting business confidence. We saw a similar dynamic back in 2011-2012 during the sovereign debt crisis, where fiscal tightening led to a prolonged economic slump and volatile markets. Given this historical precedent, we view the current political framework as a major headwind for domestic investment and growth.
This negative European outlook contrasts with a more resilient US economy, putting downward pressure on the single currency. The EUR/USD exchange rate has already fallen by over 2% in the last month, recently trading near the 1.07 mark. We believe there is more room for the Euro to weaken, and traders should look to sell into any strength.
Overall uncertainty is rising due to the mix of poor economic data, supply chain problems, and the unpredictable global trade environment. The VSTOXX, which measures Eurozone equity market volatility, has been climbing and is now sitting above the 18 level, a notable increase from its lows earlier in the year. We see value in buying call options on the VSTOXX to hedge against, and profit from, an expected increase in market turbulence in the weeks ahead.
