France is facing a house price boom and a delayed economic recovery

by Shaun Richards

The last few weeks and months have not been good ones for France and its economy. This was symbolised to some extent by this yesterday.

Castex can’t event get the french and italian flags right ( @jeuasommenulle)

Yes the French Prime Minister gave the French flag to Italy and the Italian one to France in his presentation on the vaccination programme. That was not the only issue with his presentation as another slide went backwards in time from December to November 2020. Others noted the curious omission of the UK from the numbers although there was another official announcement that it was the UK which is doing badly. From Clement Beaune

#Vaccination| “It is said that 25% of the British population has been vaccinated, this is not correct. When we look at the number of people who have a full vaccination, i.e. 2 doses, the UK  is behind many countries  in the EU “⁦ @France2tv

I note references to an apparent situation that after rubbishing the Astra Zeneca vaccine because of poor delivery they have put people off and now have too much of it. That has coincided with research suggesting that it can be more effective than the Pfizer one. So looking ahead any sort of full reopening of the French economy looks a long way away.

What is happening to the economy?

The Bank of France tells us this.

Overall, we estimate the loss of GDP in January at 5%
compared with the pre-crisis level, i.e. the same level as in December and compared with losses of 7% in
November and 3% in October.
In February, business leaders are expecting activity to be stable in industry and construction and to decline
very slightly in services, while pointing to increased uncertainty about their outlook. This would imply a loss of
GDP compared with the pre-crisis level that remains around 5%. Even more than usual, there is a high degree
of uncertainty surrounding these estimates, as they are highly dependent on changes in health measures

So they think that in essence France has carried on at the same level from December to now. Since then the Statistics Institute has reported that things got slightly worse this month.

According to business leaders surveyed between 28 January and 19 February 2021, the business climate in France has weakened slightly: at 90, the synthetic indicator has lost one point and therefore remains significantly below its long-term average (100).

As you can see it was as often often in this pandemic the services sector which dragged the numbers lower.

 The business climate has deteriorated in the tertiary sectors (services and retail trade) while it has continued to recover in manufacturing. In building construction, business leaders remain confident about their business prospects.

If we switch to the Markit PMI forecasts we continue a theme of slip-sliding away as they suggest that February saw more of a decline.

Flash France Composite Output Index at 45.2 in February (47.7 in January), 3-month low

As you can see they saw a fall in January as well which picked up in February. In their system the 45.2 of February is based on the lower (47.7) January number. The split between services and manufacturing was similar but if we look at expectations the whole situation is much weaker.

Similar to the trend for output, new orders received
by French private sector firms fell in February.
Moreover, the pace of reduction accelerated to the
quickest for three months and was marked overall.
The downturn was driven solely by the service
sector, where demand conditions deteriorated
markedly. This more than offset the fastest increase
in manufacturing new orders for two-and-a-half

So as this point we have a contrast between the economy flatlining or a reasonable decline.

Looking Ahead

The official Bank of France forecast is for 5% economic growth this year which in round numbers would put it pretty much back to pre pandemic levels. How would this happen? Well there are a couple of related factors and we got official news on part of this earlier.

Gross disposable household income (GDHI) rose during Q4 2020: +1.5% after +2.8%. Over the year 2020, it increased by +1.1% after +3.1% in 2019.

How did income rise as it was not wages or salaries?

GDHI still rises in Q4, despite the decline in the payroll received by households (−0.5% after +12.2%) linked with the downturn of economic activity and hours worked.

Lower taxes wee a factor and does everyone respond to a contraction by pumping up the housing market these days?

Indeed, GDHI benefited from the mechanical decrease of employee social contributions paid by household (−0.7% after +7.6%) and of the decline of taxes on income and wealth (–3.4% after +12.3%), which were also marked by a further housing tax reduction.

Plus social payments and benefits.

Moreover, social benefits in cash sharply increased in Q4 (+2.3% after −7.1%): on the one hand, the decrease in activity led to an increase of unemployment allowance and other means-tested social benefits. On the other hand, exceptional measures, such as partial activity and other allowance set in the context of the sanitary crisis, also supported household purchasing power

Indeed there was a form of social benefits even for businesses and I suspect this covers the self-employed too.

Finally, despite the decline of the value added of the individual entrepreneurs, their gross operating surplus benefited from the increase of the recourse to the Solidarity Fund.

The consequence of this is that many are savers now.

The combined effect of the rise of the purchasing power in Q4 and of the drop in consumption expenditure (−5.4% after +18.3%), strongly increased households’ savings rate, which stood at 22.2% after 16.5% in Q3.

Only yesterday Bank of France Governor Villeroy in an interview with South West suggested that a consequence of this will drive the recovery.

The Covid savings accumulated by our fellow citizens in 2020 are substantial: they exceed 100 billion euros, or more than 4% of our GDP.

Put like that it is a type of Helicopter Money where the state has given people money to spend. Although rather awkwardly it will be a while before they can spend it. The text books did not think of that!

Debt and Bonds

There was a little curiou in the interview as well.

No, a debt has to be paid off sooner or later. The problem is not the debt linked to Covid-19, but the level of our public debt before the crisis. It had already reached 100% of GDP at the start of 2020, compared to 60% of GDP in Germany. We cannot pass on an ever heavier backpack to new generations. 40 years ago, the public debt was 20%. Six times less than today (120% of GDP with the impact of the coronavirus).

I do not know about you but if I wanted people to “Spend! Spend! Spend!” I would not be warning them about the future like this.

If we managed to contain the annual growth of our public spending excluding inflation to 0.5% (instead of 1%), public debt would already fall to 110% of GDP.

We have had something of a bond market tantrum this week of which Francois may or may not be aware but France’s debt costs are very low and its benchmark ten-year yield is 0% as I type this.

House Prices

The Bank of France Governor will have rushed to tell his compatriot ECB President Christine Lagarde these numbers.

In Q4 2020, the rise in prices of second-hand dwellings in France (excluding Mayotte) increased: +2.4% compared to Q3 2020 (provisional seasonally adjusted results), after +0.6% in Q3 and +1.4% in Q2 2020.

Over a year, the rise in prices continued: +6.5%, after +5.2% and +5.6%.

This is especially noticeable because the way that French house price growth became positive at the beginning of 2016 gives another context to the famous “Whatever it takes” ( to get French house prices rising) speech.

Now France has what is even by Anglo-Saxon terms substantial house price growth it can add a Gallic flavour. The Euro area inflation measure completely ignore owner-occupied housing so it can all be claimed as a wealth effect.

Sadly any French first time buyer will be left wondering how they are apparently so much better off but cannot afford anything.


Our journey through the French economy gives us many by now familiar features but also a Gallic twist. I wait to see how they treat their own burst of house price inflation. But the underlying issue for 2021 is the likely delayed opening of their economy due to something of a shambolic vaccine programme. With Mario Draghi of Italy suggesting the EU switches to a first dose plan like the UK at best France will be 3 months behind.

The irony of all this is that with all the state support and spending every one else has become more French and indeed dirigiste.


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