The French government is currently scaling down its growth forecast for 2018. In the initial budget the expected growth rate was 1.7% but was upgraded at 2% in April before being scaled down to 1.7%. Bruno Le Maire the French minister of the Economy and Finance also announced yesterday that the public deficit was expected to be wider in 2018 and 2019. He crosses fingers to maintain it below 3% of the GDP in 2019. For 2018, the deficit is now forecast at 2.6% vs 2.3% expected in April.
The French growth story this year is interesting. During the first two quarters the growth number was only at 0.16% on average compared to 0.69% on average for 2017 (all the figures are non annualized). This is a division by more than 4. It’s a kind of sudden stop. Continue reading
The Q2 growth number for the second quarter was disappointing in France. It was just 0,158% (non annualized) which is rounded at 0,2%. It’s the same figure than in Q1 (0,153%).
Carryover growth is just 1.3% for 2018 at the end of the second quarter. The government growth target in the 2018 budget is 1.7%. This is attainable if growth is at 0.55% in Q3 and in Q4. We can’t imagine the reason of this stronger momentum during the second half of 2018.
Households consumption is the weakness of the French growth since the beginning of the year. Change in the purchasing power was negative in Q1 for fiscal reason (higher taxes) and was probably negative also in Q2 due to a higher inflation rate. Corporate investment was higher in Q2 (good news) after a very weak number in Q1.
For 2018 we can expect a growth figure close to 1.5% which will be way below the 2.3% seen in 2017.
This mean that the public deficit target at 2.3% of GDP will not be reached. It will remain close to its 2017 level at 2.6%.
This month marks Emmanuel Macron’s first anniversary as President. It is too soon to make a full assessment of his presidency, as he has already said himself that he wants to be judged on the full five-year term, but it is also too early to make that call because the very positive economic outlook overall could skew our analysis somewhat. Business indicators in France followed trends in the euro area, displaying a robust performance followed by a downturn.
The latest example of this is this year’s first quarter growth figure, which slowed to 0.3% in France and 0.4% in the euro area, after the country posted showings in line with its European neighbors in 4Q 2017 at 0.7%. Business leader surveys also reveal similar findings.
Economic policy still to show its mettle
It is still too early to sift out the effects of the government’s economic policy from the impact of the overall economic context, and in this respect, 2018 budget performances will provide a useful benchmark. The budget deficit came out at 2.6% in 2017, falling below the infamous 3% mark for the first time since 2007, primarily as a result of growth picking up from 1.1% to 2% between 2016 and 2017. Growth is expected to come out at 2% in 2018, flat vs. 2017, so it is government policy that will shape public finances this year and the public deficit will act as a good gauge of policymakers’ achievements.
However, there is one thing that has most definitely changed over the past year – the way the international community talks about France and its President, both investors and others. International spectators are more interested in the country, reflecting on the one hand the arrival of this newcomer bursting onto the world political stage, and on the other his active international involvement, particularly in promoting Europe. Continue reading
During the first quarter, growth was robust in the US and in Spain, slightly lower than expected in France and weaker than anticipated in the United Kingdom.
The first graph shows the GDP quarterly change since 2015, the annual average growth for the last 3 years and the carryover growth for 2018 at the end of the first quarter.
The US growth was, for the first quarter, at the same level than the 2017 average at 2.3% Nevertheless, the figure is slightly lower than the last three quarters of 2017. The impact of the strong fiscal policy is not seen yet in these numbers. The carry over growth for 2018 is at 1.7%.
The 2.2% trend seen since the beginning of 2011 is still the framework for the US growth dynamics. (see the graph on the French version of this post)
In Spain, growth figures are strong since the beginning of 2014 even if the momentum has been a little lower for the last three quarters. The trend is almost linear at 3.2% since 2014. The carryover growth for 2018 is 1.8%
In France, growth was just 0.3% (non annualized) after 0.7% during the last 3 months of 2017. In fact the first quarter figure is just a correction after the 2017 non-sustainable path for the French economy. The current trend (since 2013) is 1.3% for France, therefore 2% was too much to be sustainable. I maintain my growth forecast at 2%.
The carryover growth for 2018 is 1.2% at the end of the first quarter.
In the UK, the trend is clearly weaker since the Brexit referendum. The second graph shows the real GDP level and the trend calculated from 2014 to Q2 2016 (the referendum was on June 23). We see that there is a huge and enlarging gap between the trend and the real GDP profile. It is the cost associated with the Brexit decision. There is no reason to see a reversal in this gap. The carryover growth for 2018 is 0.7%.
French growth slows in Q1 2018 with + 0.3% (non annualized) vs. 0.7% in Q4 2017. Carryover growth for 2018 is 1.2%.
Explanation : a more limited dynamics of business investment and a marginal contraction of exports. This is consistent with the inflection seen recently in the surveys.
My expectations for 2018 is 0.4% on average per quarter. The first quarter is consistent with this. The main point to look at will be surveys during this spring. But April was not a good start. See here
Is the French economy becoming virtuous? With the public deficit falling below the 3% mark, it is tempting to think so… 2.6% for the full year 2017 and 2.1% for the last quarter of the year, so it is really very tempting.
But yet if we look at the figures and the consistency of public accounts with the acceleration in growth in 2017, our bubble bursts as the public deficit profile perfectly follows the trend in growth, which virtually doubled between 2016 and 2017, surging from 1.1% to 2%, so public finances naturally improved. We can see on the chart the strong consistency between the public deficit profile and the pace of real growth with a two-quarter lead. The deficit improves alongside economic growth but it is still difficult to stay on course when growth slows.
Inflation figures at 1.1% in February do not trigger expectations of a fast and sharp change in the ECB’s monetary policy, and Mario Draghi and Peter Praet did not indicate that they were in any hurry to implement swift or sudden change in their comments at the end of last week.
The ECB’s monetary strategy is dependent on reaching inflation in line with its medium-term objectives: the 1.1% figure does not point in this direction.
The chart below shows the contribution from each of the three main sectors to the rise in inflation, and we can see that none of them display a marked uptrend. Continue reading