Robust economic growth in France in 2017, coming in at 2%, helps ease the restrictions on public finances. The public deficit is finally set to fall below the 3% mark (2.7%), helping France shake off its image as the worst culprit in the euro area. This is the result of the French economy’s ability to benefit and take advantage of world growth.
The economic improvement drives revenues and means that countries no longer need to spend so much to shore up demand, automatically improving public finances. However, that’s not the whole story, as the French President made a campaign trail pledge to rebalance public finances during his term.
The 2018-2022 Public Finance Planning Act (link in French only) published in January does not confirm this scenario. The bill indicates that the budget balance should remain negative at -0.3% of GDP in 2022, and more worrying still, the structural balance (i.e. adjusted for cyclical components) is still poised to be negative, at -0.8% at the end of the President’s 5-year term. In other words, long-term efforts to adjust the path for public finances are poised to be inadequate over the President’s full term. Measures adopted out to 2022 will not be enough to balance public finances alone, setting aside cyclical components. Continue reading
The French GDP growth in 2017 has accelerated to 1.9% on average after 1.1% in 2016. The quarterly sequence of the GDP expansion was steady at 0.6% per quarter except 0.5% in the third quarter.
The carryover growth for 2018 at the end of 2017 is 0.9% which slightly higher than a year ago. At the end of 2016 it was at 0.4% for 2017. The effort that has to be done to converge to 2% in 2018 on average will be lower than in 2017. It is just a 0.42% increase per quarter (versus 0.58% in 2017).
The very positive part of the fourth quarter report was the strength of corporate investment.
The government budget for 2018 has been defined with a 1.7% growth (or 0.33% per quarter). This means that we can expect higher receipts compared to what was forecasted. The government credibility will be measured by its ability to use these extra receipts to reduce expenditures not to increase them. In the past these type of temporary receipts were systematically spent in permanent expenditures leading to a persistent budget deficit. We can expect a different strategy from the president Macron.
A reduction in expenditures and therefore lower demand would be consistent with what we currently perceive on the business cycle. A recent survey has shown that it was quite impossible for companies to increase their production. The production capacity utilization rate is at a peak, production bottlenecks are growing and there are difficulties in hiring.
With these constraints in mind, a boost in demand through higher government expenditures would be a mistake. The target is to reduce these constraints through incentives on investment (through public investment) and education. That will be the main government task in 2018.
The graph below shows that the current growth trend is slightly lower than before the 2008 crisis. It means that there will be no catching up and that the cost of the crisis is permanent. The gap between the current GDP level and the trend from 2000 to 2008 is -8%. The GDP level would have been 8% higher without the crisis. This is quite big and this gap will widen in coming years as I do not expect a catchup of growth.
Growth in France is set to come to 1.8% in 2017 and 1.7% in 2018. From today’s standpoint, these figures look high as trend growth for the French economy came to slightly more than 1.1% on a yearly basis between 2013 and the third quarter of 2017, making 2017 and 2018 look like good vintages. However, a comparison with the pre-crisis period is harsh. Trend growth for the French economy stood at 1.8% over the period between 2000 and 2008 and could go well beyond this figure, which equates to the cycle peak in today’s economy.
The extent of the economic cycle provided leeway for all concerned as growth could go well beyond this trend, e.g. coming out at 4% in 2000. French economic policy at the time did not generally view this cycle peak as an opportunity to adopt a more restrictive strategy, and France as a whole was unable to reduce imbalances when growth was strong, particularly from a budgetary standpoint. The French budget “funding pot” concept, invented during periods of vigorous growth, was used to justify all sorts of spending on the back of higher budget revenues. Continue reading
The Macron presidency is finally going to be able to unleash its full momentum. Talks between the government and trade unions on the broad trends for forthcoming changes to French labor legislation have taken up a good deal of time over the past few weeks. The government decrees were announced on August 31 and will come before the French Council of Ministers on September 21: the President’s term can now really get started.
The government’s aim is to make the labor market more adaptable to change by altering certain aspects of labor law. Continue reading
The President-elect has won an overall majority after the general elections. His party will have 306 seats and 348 when the Modem, a close political party, is included (on 577 seats). Nevertheless, the new majority will not depend on ally (Modem).
It’s far from the tsunami that was expected after the first round. The new President majority will represent 60% of the seats (versus almost 80% expected after the first round) it is close to the average seen since 1981.
The French general elections will give an overall majority to Emmanuel Macron the President-elect. After the first round, yesterday, La Republique En Marche (LREM) his political party can expect between 400 and 455 seats on a total of 577.
1 – French people are legitimist; they have given a large majority to the new President enabling him to pass the reforms he announced during his campaign. This mustn’t be a surprise. The new President has always had a majority notably since 2002 as general elections follow the presidential election by a month. Nevertheless the LREM victory is large but not the largest as it can be seen on the graph below. Continue reading