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Gap Between German, French Economies Widening

Germany and France, the euro zone's two biggest economies, have both been relatively resilient during the euro zone crisis, but weakness in France may make their fortunes increasingly divergent, analysts say.

Victory Column
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Victory Column

Thursday’s PMI numbers for September, usually a useful forward sign for economic growth, were a case in point. In Germany, the index rose from 44.7 to 47.3 for manufacturing and from 48.3 to 50.6 for services, while across the border in France, the manufacturing number dropped to its lowest level since May 2009, 42.6, from 46.0, while the service index fell from 49.2 to 46.1.

“There is clearly a diverging view of the economic outlook on both sides of the Rhine,” Francois Cabau, European economist at Barclays, wrote in a research note. He described the French numbers as a “surprising and worryingly large dive.”

The often uncomfortable neighbors have spearheaded efforts to solve the euro zone debtcrisis.

France’s comparative weakness may have been affected by nervousness about a controversial new wealth tax which has sent high-profile rich French businessmen like Bernard Arnault, chief executive of Louis Vuitton Moet Hennessey, one of the world’s biggest luxury goods companies abroad.

Yet some of the country’s economic fundamentals are starting to look increasingly weak, as the government prepares to announce its 2013 budget on Friday. Economists predict that its gross domestic product (GDP) will grow by only 0.5 percent next year, compared to 1.4 percent in Germany.

France is now being increasingly identified by economists like Nouriel Roubini, famed for calling the start of the credit crisis, as part of a “soft core” within the europage90eur=falsetrue43pricetruefalsefalsefalse0QuotefalsetrueChartfalsetrueNewsfalsetrueProfilefalsetrueAdd to Watchlistfalsetruetruehttp://api-cdn.cnbc.com/api/chart/chart.aspGE4true3zone who are not as resilient as countries like Germany.

France’s banking system is more exposed to the peripheral economies like Spain than Germany’s.

It also has much more fiscal tightening to undergo before reaching its budget targets, according to Cabau.

One key signal of whether Germany is pulling away even faster from France will come with the Ifo business sentiment index on Monday, which analysts at Credit Suisse predict will edge up slightly after four consecutive falls, amid renewed optimism about the euro zone following the European Central Bank (ECB)’s high-profile new bond-buying program.

—By CNBC’s Catherine Boyle; Follow Her on Twitter @catboyle01

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