During spring, GDP was flat for the second consecutive quarter. The one year change is barely positive at 0.1% and the carry-over growth for 2014 is just 0.3% at the end of the first semester. (Carry-over is the annual average growth for 2014 with the hypothesis that GDP level in the third and the fourth quarters will be equal to the second quarter GDP level. It’s a useful approximation).
The new French government forecast is 0.5% for 2014 instead of 1%. But with a carry-over of 0.3% it will not be an easy task as a growth of 0.3% (non-annualized) is required for the third and the fourth quarters. Such a rebound has not been seen since 2010 and is not seen yet in July companies’ surveys. This means that 0.5% can be perceived as a top range forecast.
One immediate implication is that the target of 3% for the budget deficit in 2015 is clearly not warranted. The French Finance Minister, Michel Spain, said that the 3.8% target for 2014 will not be respected and that the deficit will be above 4%.
For 2015 the government has announced a GDP forecast at 1%. Even if the 0.5% for 2014 is attained, it supposes a 0.25% GDP growth every quarter (non-annualized figure). I hope it is not too ambitious.
The first chart presents the French GDP in level and at constant prices. In red is the trend calculated from 2000 to Q1 2008. The trend growth rate was 1.8%. Since the trough in Q1 2009, the GDP average growth is just 1.05%. The gap between GDP and its pre-crisis trend is 9.1%. It represents the cost of the successive shocks that have affected the French economy. It’s huge.
On this chart, we see the large impact of the sovereign debt crisis and of austerity policies in the Euro Area under the auspices of Brussels since 2011.
Contributions to GDP quarterly growth are the best instrument to decipher the source of changes in the economic activity. That’s what the next chart shows.
During the second quarter households’ consumption and government expenditures have had positive contributions. The three others, investment, net exports and inventories, were a drag to the economic activity.
The consumption momentum suggests that the rebound in the second quarter was just the mirror of the negative number seen during the first three months of the year. Services’ consumption has grown at the mere 0.1% as in the first quarter, and the rebound was just seen in manufacturing goods and energy. Stronger services are needed to suggest a change in trajectory.
Looking at the chart we see that government expenditures have a positive contribution in every quarter of the chart. It shows their importance; cutting them too rapidly would probably be the source of a new contraction of the economic activity as private demand remains weak (see here).
The main problem with the French growth figures is the weakness in investment. The two charts below are linked to this issue.
On the first, there is a decomposition of investment by contributions. For the last 10 quarters, residential investment is negative. Incentives to buy have been reduced and real estate prices are still high even if they start to falter (see here). This part of the investment shows a real crisis in the real estate sector and the lack of confidence from households. Public investment is neutral. That’s a weird part of the French government policy. The “Pacte de Responsabilité” is supposed to create incentives for companies to invest. But in a weak environment companies will adopt a wait and see behavior. Having stronger financial conditions (from the Pacte de Responsabilité) is not sufficient to invest; there is a need for an impulse from expected demand or from public investment. That has to be the role for economic policy
The second chart represents the investment rate. It was trending upward until the crisis. It is now stable and behaves almost like the GDP i.e. not very fast. This ratio shows that there is no break from investment. It is problematic for potential growth. In addition to what was said earlier, it is probably necessary to define a more defined framework for the future. Until 2007, the economy came back to a kind of equilibrium framework. The different shocks on the French economy push the French economy out of this framework. The role of economic policy is to define a new framework and a trajectory to converge to it (The idea here was developed a long time ago by Axel Leijonhufvud, in a paper “Effective Demand Failures”. You can find it here). This is not done in France while it is a part of economic policy and a source of credibility for it. By the way there is still large uncertainty that reduces the capacity for private economic agents to take risks.
Long term growth pattern is also a source of difficulties. The chart below represents GDP growth with a five-year moving window.
From world war II to now, there are three periods: the first with the “30 glorieuses”. The GDP growth rate was close to 5-6% per year. That’s probably one part of our current difficulties as some institutions were built with such a strong expansion. After the first oil shock, growth was down to a little more than 2% per year. This was a quite stable period as it can be seen on the chart. The growth rate moved from 1 to 3 %. For the last five years, GDP growth is just 1%. Is it the New Normal? With a positive population growth this means that GDP per capital can barely grow. That’s why something has to change.