The struggles of the French economy are continuing

by Shaun Richards

This morning has brought more disappointing news both for and from the French economy. The statistics institute has released this.

In September 2018, households’ confidence in the economic situation has declined: the synthetic index has lost 2 points and reached its lowest level since April 2016. It remains below its long-term average (100).

This index has been in use for 31 years now so the fact that it is below its long-term average does give us some perspective. Also reaching a level not seen since April 2016 takes us back to around when what we might call the Euroboom began (in the second quarter of 2016 the French economy shrank by 0.2%) which will provide some food for thought for the European Central Bank or ECB. It has been on the wires leaking hints about how it will continue to withdraw its monetary stimulus just as its second largest economy has shown more hints of weakness. If we stay with the Euro theme this measure welcomed it by going above 120 but such heady days were capped by 9/11 and now we have seen 97,97,96 and then 94 in September. So there has been a long-running decline overall which did see a rally in the period 2013 to 17 but perhaps ominously turned down at a similar level to 2007/08. Also the outlook is not bright according to French households.

Future standard of living in France: strong
degradation……… The share of households
considering that the future standard of living in France
will improve in the next twelve months has sharply
declined: the corresponding balance has lost 7 points
and stands below its long-term average.

Markit PMI

This hammered out a similar beat last week.

Output growth across the French private sector
slipped to its lowest since December 2016 during the
latest survey period, with data indicating a broadbased
slowdown across both the manufacturing and
service sectors.

This slowdown had as part of it something you might expect with the ongoing diesel debacle and the trade wars.

Manufacturing businesses frequently reported a deterioration in the automotive sector.

This poses a question if we move to what the French economy did in the first half of 2018. Just as a reminder quarterly economic growth went 0.2% in something of a surprise but then backed it up with another 0.2% reading. I contacted Markit’s chief economist pointing out that a reduction on 0.2% as implied by their survey looked grim. But they are sticking to the view that France did better in the first half of the year and in spite of the recorded slowdown is doing this.

Across the region, growth slowed in Germany and
France but both continued to outperform the rest of
the eurozone as a whole, where the pace of
expansion held close to two-year lows.

I have no idea how France is outperforming by doing worse but there you have it. There were times when Markit was accused by the French government of being too pessimistic about France whereas now it must be delighted with its work.

The official surveys for businesses are also above their long-term averages but the situation here is awkward especially if we look at services. Here the confidence indicator has been stable around 105 for a few months or so suggesting growth and yet if we move to the actual data we know that the French economy has struggled.

Bank of France

In the circumstances the projections released earlier this month look rather optimistic.

In a less dynamic, more uncertain international
environment, French GDP is expected to expand
by 1.6% in 2018, 2019 and 2020. GDP growth
should remain above potential, helping to drive
further reductions in France’s unemployment rate.

They are plainly suggesting that the first half of 2018 will be followed by a vastly more dynamic second half involving growth of 1.2% as opposed to 0.4%. But once you look past that I note that 1.6% economic growth is described as “above potential” which to me seems somewhat depressing. Central bankers have a habit of thinking the same thing at the same time and this reads rather like the 1.5% speed limit that the Bank of England Ivory Tower has suggested for the UK economy.

In essence it is downbeat for domestic demand but hopes that export growth and some investment growth will take up the slack. Let us hope that it is right about the area below as unemployment in France remains elevated compared to its peers.

The ILO unemployment rate should fall gradually
to 8.3% at the end of 2020 (France and overseas
departments)

Although that is still high meaning that for some in France unemployment will be all that they have known.

Public Finances

Perhaps we are seeing an official response to the growth malaise. From Reuters.

France will reduce the tax burden on households and companies by nearly 25 billion euros ($29.4 billion) next year, the government said in its 2019 budget bill, pushing the deficit up towards an EU cap as the economy fails to gain pace.

This represents a change of direction although we do see something very familiar these days in the split between businesses and individuals.

Households will see their tax bill reduced by a total 6 billion euros while business taxes will fall by 18.8 billion euros, resulting in the overall tax burden decreasing to 44.2 percent of national income, the lowest for France since 2012.

There is also some pump priming on the expenditure side of the accounts although it is a reduction on the previous 1.4%.

While the government has kept overall public spending stable this year after inflation, the 2019 budget foresees an increase of 0.6 percent after inflation.

If we move to the debt situation we see what is a factor in President Macron’s enthusiasm for a shared budget in the Euro area.

At the end of Q1 2018, the Maastricht debt reached
€2,255.3 billion, a €36.9 billion increase in comparison
to Q4 2017. It accounted for 97.6% of gross domestic
product (GDP), 0.8 points higher than last quarter’s
level.

This looked like it was going through 100% but was rescued by the growth spurt. Now we wait to see what happens next should the French economy continue the struggles of the first half of 2018.Also there are risks on the debt costs side as we see two factors at play.The first is the tend towards higher bond yields we have sen recently and the second is the ongoing reduction in ECB purchases of French government bonds which had reached 410 billion Euros at the end of August.

Comment

If you want some good news then the sporting front has provided it for France in 2018 with its football world cup victory and it is just about to host golf’s Ryder Cup. But the economic news has disappointed pretty much across the board in an irony considering it is supposed to now have a business friendly government. It is true that the tax cuts are weighted towards the private-sector but so far the economy has slowed down rather than speeding up.

Unless the French statistics office has been missing things the ECB will also be noting that its second largest economy has turned weaker. That will provoke thoughts suggesting it can only boom in response to pretty much flat out monetary stimulus. Also there will be worries about what might happen if the ECB tightens policy as opposed to reducing stimulus. There is a case for that from the inflation data as the annual rate has risen to 2.6% on the equivalent measure to UK CPI which may be why French consumers feel so negative about the economy.

The current issues with the sale of Rafale fighter jets to India seems symbolic too. Corruption in such sales is of course far from unique to France but I also note that the way President Macron is distancing himself from it ( It was not on my watch….) bodes badly for what may happen next.

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