France: the disturbing path of the Industrial Production Index

The chart below presents the French Industrial Production index on a very long period. We clearly see 3 different episodes. During the 60’s growth was really strong, the slope was steep. After the first oil shock growth was slower, the slope was milder than before. The third episode started in 2008. It represents a deep break in industrial activity.

May 1968 excepted, I drew a red circle on the two main recessions known by France during the period and characterized by a strong drop of the index. It was the case in 1975 after the first oil shock. It was also the case at the end of 1992 during the European Monetary System crisis. In both cases, the negative shock was temporary and the level of the industrial production index was back rapidly to the level seen before the crisis. Austerity was put in place only at this moment, not before. After the first oil shock Raymond Barre the Prime Minister did it and in 1995 the then Prime Minister was Alain Juppé. Nevertheless, the French economic dynamic was stronger than now during these two episodes. As it is shown in the 4th chart of this post (read here) the out of recession was stronger after 1974 and after 1992 than it was after 2008.

In the current period, the 2008 break was followed by a rapid rebound that found its sources in the different plans that were put in place in numerous countries. But in the Euro Area, the sovereign debt crisis and the commitments taken by governments to rapidly rebalance their public finance, this rebound stopped at the very beginning of 2011. Institutional uncertainties linked to the Euro Area survival and austerity policies were the good recipe to stop the rebound. Since the beginning of 2011 economic activity in the Euro Area is trending downward. And even Germany’s strength is not able to rebalance this dynamic.

For France, this strategy had led to zero growth. GDP (4th quarter 2012) is currently at the same level than in the first quarter of 2011 and to a strong downward trend for industrial production as it can be seen on the chart. As French economic partners shared the same policy, the trend was negative in most countries reinforcing the downward pressure.

What is puzzling is that austerity policies, governments’ commitment to rebalance rapidly public finance, have been taken before the moment where the industrial production index was back to its pre-crisis level. We can see that clearly on the chart for France. It can also be seen on larger measure as GDP where most Euro countries have their GDP level still below the 2007 level.

For France the recovery was slower than in 1974 and 1992 episodes (see the chart on GDP per capita mentioned above) and austerity policy was put in place too rapidly. The economy was not back to a kind of equilibrium (pre-crisis level) that new policies constrained it and on internal demand (see here). That was too much and the economy rapidly went back on recession. This is simple and logical.

This policy at the Euro Area scale has had negative impacts on world trade dynamic (see here). It has reduced the momentum in different regions of the world. In a world economy where the different plans to restore growth were exhausted, Euro Area was a drag on global growth. As a consequence the world momentum couldn’t be a support for European and for French growth. The French industrial production profile is a measure of this not so virtuous sequence.

There is a need to change in the Euro Area. A new hierarchy of economic policies is may be part of the solution as I mentioned it here. Looking at the production profile since 2011 is worrisome and at the end, if nothing is done, this could lead to social unrest. That’s why something has to change in France (see here) and in the Euro Area.