French growth’s low momentum

The French GDP growth was 1.1% (at annual rate) during the fourth quarter of last year. The same number than during the third quarter.
Social unrest has had no impact on the headline figure. Nevertheless, details show that the private sector domestic demand stalled (0.2%) during the last quarter after a strong 2.4% growth in the third quarter. Households’ consumption was 0 and investment contribution was at 0.2% versus 0.9% in Q3. On companies’ side, investment contribution decreased on the same scale (0.2% after 0.9%). Residential investment was down with a negative contribution (-0.1%).
The good surprise was on exports’ side with a strong increase at 9.8% vs 0.7% in the third quarter. Therefore and despite a rapid imports’growth, the external demand contribution was positive at 0.9% after 1.1% in Q3.
Inventories have had a marginal negative contribution.

For 2018, the average growth was at 1.5% after 2.3% in 2017 but the end of 2017 was the peak of the cycle and the economy is now converging to its potential.
In 2019, with 1.2% per quarter which is close to the 2018 average, growth will be at 1.1%. We have a forecast at this level. It way below the government forecast at 1.7%. We can’t expect a strong reversal in the GDP momentum that could justify such a forecast.
In 2019 consumption will be pushed up by all the measures on purchasing power that has been announced by the President Macron in December. But as long as social unrest remains companies will not boost their investment. The improvement seen on exports will not last. World trade is slowing down rapidly and France will follow this trend.
In other words, the French economy has a limited growth momentum (just 0.9% from Q4 2017 to Q4 2018). With social unrest and uncertainty on external trade, the French economy will continue this trend close to 1% in 2019.

Purchasing power, debt and jobs – the impossible French equation

This post is available in pdf format Forbes-23-01-2019-PW-en

Careful observation of the French economy provides some insight into the swift escalation in social unrest since November. The initial question of purchasing power sparked off the movement in November. At the start of the financial crisis, purchasing power was not too severely hit initially due to the hefty impact of automatic stabilizers, i.e. economic mechanisms that help even out the effects of shocks over time via redistribution. This system had worked fairly well in the past, keeping GDP fluctuations down during economic downturns. This is one of the key aspects of the French redistributive model.
With a continued weaker macroeconomic situation than in the past, the economy adapted. Three major changes can help shed some light on the social strife that has been dragging down the French economy.

The first problem is that French economic trend growth is now more sluggish than before the 2008/2009 crisis, and this has an impact on purchasing power trends.
We can analyze this situation using the chart below, providing an overview of purchasing power trends on the one hand (demand) and productivity data on the other (supply).
The purple line shows the trend in purchasing power per consumption unit and the blue line plots productivity (GDP per hour worked). We can see that these two indicators ran parallel before the 2007 crisis, then diverged until 2012/2013 before converging again, although with weaker trend growth than before the crisis. Under normal circumstances, these two indicators should move at a similar pace, and a long-lasting divergence is not feasible i.e. wages cannot be disconnected from income creation via the production process

The yellow vests and the French economic outlook

The French economy remains under pressure at the beginning of 2019. Business leaders do not want to commit to the long term because of the uncertainty that hangs over the immediate situation. Since November, there has been a clear drop in orders for capital goods. It may imply a sharp slowdown or even a decline in productive investment around the turn of the year.leading to a low trajectory. The protracted social unrest is beginning to weigh on employment, as shown by the rapid slowdown in hirings as measured by the French Social Security for the fourth quarter of 2018.
We can not spontaneously wait for relay from the European countries. The composite indicator calculated by Markit for the Euro zone is at its lowest since July 2013. The impetus will not come from there.
The difficulties of reducing social uncertainty will weigh on the profile of 2019 growth, which will probably have to be revised downwards. We must now think about a growth rate of around 1% for the whole year. The “Grand Débat” launched by the French President Emmanuel Macron to reduce the current social unrest and the preparation of the European elections next May, where new lists (yellow vests) appear, will maintain this deleterious climate. This will not help either employment or purchasing power. France goes around in circles.

INSEE expects a moderate recovery in activity in 2019

The latest outlook note from French national statistics body INSEE (full-length version in French, English summary available here) suggests that the French economy will not be affected on a sustainable basis by the recent wave of social unrest in the fourth quarter of the year. The pace of growth over the first half of 2019 fits with the trend witnessed since 2013, apart from 2017, which was an exceptional year.We can see this return to normal on the chart below, showing the half-on-half change in economic activity as reflected by GDP. The pace has returned close to pre-2017 stats and growth is near its potential rate. In these figures, average growth is set to come to 1.5% in 2018 and carry-over at the end of 1H 2019 at 1%.

We can see this return to normal on the chart below, showing the half-on-half change in economic activity as reflected by GDP. The pace has returned close to pre-2017 stats and growth is near its potential rate. In these figures, average growth is set to come to 1.5% in 2018 and carry-over at the end of 1H 2019 at 1%.

The slow transformation of the labor market in France

The unemployment rate is stable in France in the third quarter. It stands at 8.8% for metropolitan France, as it was during spring and at 9.1% when overseas departments are included, again as it was in the second quarter. The pace of the unemployment rate is consistent with that of the economic cycle. Nevertheless, it reacts now a bit faster to the evolution of growth than before the 2008 crisis.
All the indicators suggest that growth is richer in jobs and that it regains some virtue with the increase in full-time work, the rise in fixed-term contracts and the decline in the share of fixed-term contracts.
The labor market is becoming more flexible and it is certainly a positive factor for the dynamics of employment. It is now necessary to improve the training component to further improve this phenomenon by enriching human capital. The aim is to bring down unemployment permanently and move towards full employment. The law passed last summer can contribute to it, it must now be implemented efficiently.
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France: the growth momentum is lower than expected

The French government is still expecting a robust recovery for the last three months of 2018 and for 2019. Companies’ surveys for October do not allow such optimism. 
The main point is the rapid slowdown in the manufacturing sector. It was the leading sector in 2017 and its dynamics was an important contributor to the strong expansion seen this year. It was a source of impetus for the rest of the economy. 
Its current lower momentum is a source of concern. The retail sales sector is weak reflecting question on purchasing power for every French consumer.
My expectations is that the French economy is back to the trend seen before 2017. It means that the forecast for GDP growth is close to 1.4%. This is consistent with what these surveys say. No strong recovery is expected and the French economy will converge to its potential growth which is lower than 1.5%.
The following graph shows the transitory recovery of 2017.france-semester growth.png 

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French public debt stands at 100% of GDP – My Tuesday column

This post is available in pdf format My Tuesday Column – 1 October 2018

French public debt stands at close to 100% of GDP, but is this really a cause for concern?
No – it is important not to overstate the importance of this figure. French statistics body INSEE made the news as it measured public debt at over 100% of GDP for 2017, when it included railway operator SNCF’s debt. However, this is no longer the case, with debt accounting for 99% of GDP in the second quarter of 2018.
The chart shows two phases in French public debt trends – before and after the 2008 financial crisis. The State increased its debt issues and thereby smoothed the way for macroeconomic adjustment to the crisis by spreading out the shock that hit the French economy over the longer term.
We can see that the figure then rises again after 2010, but this is not a specific feature to France. It reflects slower growth in the French economy over the longer term, and a welfare set-up that failed to change to adapt to this new trend: so soaring public debt denotes a sluggish adjustment from French institutions.
In other words, the primary role of public debt is to help spread the load at times of economic shocks, but it skyrockets when the economy is slow to adjust to new economic conditions.dettemaastrichtFrance-en.png

Is the 100% of GDP threshold a problem or not?
The figure itself is impressive and somewhat symbolic, but it is not necessarily damaging for economic momentum per se. Japanese public debt stands at 240% of GDP, yet the country has come through the financial crisis better than others judging by per-capita GDP: the country does not seem to be in danger of default.
The real problem is that we do not know just when public debt can actually become detrimental. Rogoff and Reinhart indicated in their research that public debt begins to dent growth when it moves beyond 90% of GDP, and this rule at least partly spurred on the European Commission’s austerity policy in 2011 and 2012. However, this argument does not hold water: R&R’s calculations were wrong and there is no rule on excessive public debt. Continue reading