Economic growth is fading in France

by Shaun Richards

This morning has opened with the first of the major European and in this instance Euro area economies to report on economic growth in the second quarter of this year. We used to get France and Germany together but today it has been just La Belle France.

In Q2 2019, GDP in volume terms decelerated slightly: +0.2% after +0.3%. ( Insee)

There are various perspectives on this of which the most obvious is that growth so far this year has not been much and would be 1% for the whole year if repeated. Also that the number was worse than what markets expected.. It is a function of the times that we are in that we are analysing the numbers to 0.1% isn’t it? However, there does appear to be a downwards trend if we look at the last three quarters which have gone 0.4% then 0.3% and now 0.2%.

This means that the number backs up what the Bank of France thought.

According to the monthly index of business activity (MIBA), GDP is expected to increase by 0.2% in the second quarter
of 2019 (third estimate, revised downwards by 0.1 percentage point).

In case you are wondering how the market came to expect 0.3% so am I?! If we look into the detail of the Bank of France analysis there was an ominous portent for the rest of the year.

In the manufacturing industry, the business sentiment
indicator* stood at 95 in June, after 99 in May………In services, the business sentiment indicator* stood at
100 in June, like in May…….In construction, the business sentiment indicator* stood at 104 in June, after 105 in May.

According to its survey things turned down in construction and manufacturing in June. Whilst the manufacturing fall was larger the construction one may be noted by ECB President Mario Draghi as he used the construction sector as an example of a success for his policies only last Thursday. There was some optimism for July although the more recent Markit survey for July was less optimistic/

The slowdown was driven by softer new
order growth, as sales at manufacturers slipped back
into contraction territory at a time of ongoing geopolitical tensions.
Notably, the rate of expansion in overall business
activity remains historically subdued and far weaker
than the averages registered during 2017 and 2018.

Although we should also note that Markit were wrong to suggest the French economy had picked up in June.

GDP Breakdown

We can start with trade which simultaneously was and was not a factor in this.

Imports remained almost stable in Q2 (+0.1% after +1.1%) and exports grew at the same pace than previously (+0.2%). All in all, foreign trade balance did not contribute to GDP growth: 0.0 points

As you can see this quarter it had no influence but it is also true that in 2019 it has stopped being a positive influence. If we look back to 2018 we see that exports grew by 3.5% as opposed to the 1.2% of imports. Thus trade contributed to economic growth. Whereas we see that the impact has been negative this year as a flat second quarter followed a 0.3% influence in the first quarter. In other words we are seeing the impact of the trade war.

If we look at domestic demand then it strengthened and had a positive switch.

Household consumption expenditures decelerated (+0.2% after +0.4%), while total gross fixed capital formation accelerated sharply (GFCF: +0.9% after +0.5%). Overall, final domestic demand excluding inventory changes accelerated slightly: it contributed 0.4 points to GDP growth, after 0.3 points in the previous quarter.

Economics 101 would be very happy at the growth in investment which more than offset the decline in consumption. If there is a catch it is the issue of strong investment growth with weak economic growth overall.

Finally it is hard not to have a wry smile as we note that it looks like France also did some Brexit stockpiling.

In Q2 2019, changes in inventories contributed negatively to GDP growth: −0.2 points (after +0.3 points).

Of Debt and Deficits

France now has the largest national debt in the Euro area at 2.359 trillion Euros as of the end of the first quarter of this year. It had just nudged past Italy by a few hundred million Euros. In relative terms its better GDP numbers mean that in relation to  annual economic output it is at 99.7% as opposed to 134%. Should economic growth remain weak in 2019 it is in danger of moving past 100% and may have already done so.

On the other side of the coin is the factor I looked at in terms of my home country the UK only yesterday which is that borrowing is cheap. In this instance it comes not only from the 420 billion Euros already purchased by the ECB but the expectations that it is about to sing along with Britney Spears.

Hit me baby one more time.

Indeed she is not short of advice.

Gimme, gimme (More)
Gimme (More)
Gimme, gimme (More)
Gimme, gimme (More)
Gimme (More)

Indeed France is being paid to borrow on an ever wider scale. For example the ten-year yield is -0.13% as I type this. So the “bond vigilantes” are a bit like General Custer at Little Big Horn because France has borrowed more but in return has seen its bond yields plunge rather than rise. If we switch to the infrastructure investment horizon we see that the thirty-year yield is 0.81% so it has around a 0.5% advantage on the UK. As ever the catch is finding the right projects to finance.

Comment

If we switch to a wider view we see that France is not escaping the wider economic slowdown. Staying within the Euro area we see that economic growth in Austria has also slowed from 0.4% to 0.3%, so there has been a similar pattern. Looking outside it shows some grim news from Sweden.

Sweden’s GDP decreased 0,1 percent in the second quarter of 2019, seasonally adjusted and compared to the first quarter of 2019. GDP increased by 1,4 percent, working-day adjusted and compared to the second quarter of 2018. ( Sweden Statistics)

It was only last Thursday that I pointed out the bad timing of the interest-rate increase of the Riksbank.

Returning to France the main fear now will be the labour market. As we have discussed many times the structure of its economy with its rigid labour rules tends to lead to high unemployment numbers. Whilst the situation has improved considerably the unemployment rate of 8.7% is much higher than its peers and with weak economic growth the improvement seems set to fade and perhaps stop. Was that it?

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