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Our Pulse indicators leave a misleading negative impression. Indeed, with a 0.3% q/q print in Q3 2019 (first estimate), French growth continues to prove remarkably resilient and stable. And Q4 prospects look similarly positive judging by the October and November results of INSEE business confidence surveys and Markit PMIs. Admittedly, the composite indices were almost unchanged in November but they stand at a relatively high level (105 and 53, respectively). Besides, the headline figures mask more positive details, like, for instance, the improvement in the industry sector (whose confidence index, it is worth emphasizing, stands in the expansion zone contrary to Germany where it is in recession) and the rise in the employment and new export orders components.
In 2018, France remained an attractive place to invest, despite a tense social climate and an economic environment marked by the slowdown in European economy, Brexit and trade tensions between the United States and China. According to the EY barometer, France outperformed Germany and ranked right behind the UK in terms of the number of foreign investment projects. The industry, digital and services to corporate clients sectors attracted the greatest number of projects. France’s attractiveness highlights the resistance of its industrial network, the strength of its entrepreneurial ecosystem and the dynamism of its research. Recent reforms are also having a favourable impact. However, there is still room for progress in terms of taxation and labour costs.
In the 2020 draft budget bill, the government is forecasting a deficit of 3.1% of GDP in 2019 and 2.2% in 2020 (after an observed deficit of 2.5% in 2018). The improvement in the 2020 deficit is misleading for the same reason as the widening of the 2019 deficit. Unlike the 2019 figures, 2020 no longer shows any traces of the one-off fiscal cost of the transformation of the CICE tax credit into reduced employers’ contributions. Excluding exceptional items, the fiscal deficit narrows by 0.1 point each year to 2.1% in 2020. The new 2020 deficit target is nearly a point higher than the one proposed last year in the 2019 draft budget bill. The wider deficit can be attributed in equal proportions to the downward revision of growth forecasts and structural adjustment
Our Pulse indicators are less dispersed than at first glance. In the north-east quadrant, sending a positive signal, we find in particular the INSEE confidence surveys for September whereas in the south-west quadrant, sending a negative signal, we have August hard data. Which signal prevails ? The question has no easy answer. The good performance of the INSEE surveys is as encourageing as is concerning the disappointing trend of production and household consumption expenditure on goods. Our Nowcast model reconciles the two sets of data. Be it based on the soft data or on the hard ones, Q3 growth is estimated at a similar small 0.2% q/q. This matches our official forecast while the INSEE and the Bank of France have just confirmed their own at 0.3%.
The French economy continues to show proof of resilience judging from the stability of its GDP growth?–?at an annualised rate of just over 1%?–?and the relatively strong showings of confidence surveys and of the labour market. Although prospects are still favourable, the horizon has darkened in recent months with Germany showing signs of recession, the escalation of trade tensions and lingering uncertainty over Brexit. We expect business investment and exports to decelerate sharply under the weight of a more uncertain, less buoyant external environment. Yet the slowdown is likely to be offset by the expected rebound in household consumption, supported by major fiscal measures to boost household purchasing power.
Job polarization describes the structural deformation of the job market in which the share of jobs increases at the top and bottom of the skills ladder and decreases for middling jobs. In theory, job polarization is U shaped. Empirical data easily shows a decline in the share of jobs in the middle distribution (the bottom of the U), as well as an increase in the most skilled jobs (right side of the U). This J-shaped semi-polarization is symptomatic of an “upgrading” effect, i.e. the overall rise in the level of education and skills attainment. The left side of the U, in contrast, which represents the increase in the share of low-skilled jobs, is often less developed and sometimes non-existent. In France, job polarization is more or less apparent depending on the study
Our pulse indicators continue to send a positive signal: stability of the INSEE business and consumer confidence surveys in August, even a slight improvement in the composite PMI; a more important than expected fall in Q2 unemployment rate (-0.2 points, at 8.5%); a small but solid rebound in July consumer spending on goods (+0.4% m/m); a slight upward revision of the second estimate of Q2 GDP growth (+0.1 point, at 0.3% q/q), thus running at the same rate as in Q1.
The signs of stabilisation seen at the beginning of the year have been followed by improvements in confidence surveys. The upturn in consumer confidence has been the most marked and the most encouraging of these. The rather more mixed nature of the economic data available tempers these positive signals somewhat, and leads us to forecast stable growth in Q2, at 0.3% q/q, making this the sixth quarter in a row to see growth at around this pace. This stability, which is remarkable in and of itself, is likely to continue over the coming quarters according to our forecasts. It is a good sign of the resistance of French growth to downward pressures. Under our scenario, this resistance demonstrates a degree of effectiveness in the measures taken to support consumers and businesses.
The INSEE has just developed a new graphical tool, a tracer of business confidence, that helps position the French economy within its cycle and track economic trends. The recent past is characterized by changes in the economic situation of limited magnitude but quickly evolving: the cyclical upturn in 2017 was followed by a slowdown as soon as 2018 before going back into the expansion zone since the start of 2019 but timidly so (close to the frontier with the “slowdown” quadrant). What stands out from this chart is therefore more the hesitant, “caught in-between”, feature of the current economic situation in France rather than its favorable (and resilient) aspect
Our pulse indicators are sending a clear positive signal. Only the composite PMI surprised on the downside (51.2) and is below trend.
Since Q3 2018, private payrolls gains have been on an upward trend (+31k in Q3 2018, +54k 2018 in Q4, +66k in Q1 2019), contrasting favorably with the stability of GDP growth over the same period. Nearly 900,000 private payrolls were created on a net basis since the 2013 trough. The prospects for 2019 are encouraging judging by the latest Pole emploi study on manpower requirements, which reports another sharp rise in staffing plans of 15% after an impressive gain of 19% in 2018. These plans represent 2.69 millions of potential hiring. Their number is up in every sector and in a particularly dynamic way in the construction, industry and business services sectors. The large increase in recruitment projects on open-ended contracts (+24%) is also noteworthy (+8% for fixed-term contracts)
In 2019, French households are expected to benefit from major purchasing power gains, which we forecast at roughly 2.5%, the biggest increase since 2007. Several factors will contribute to this big gain. Tax cuts will be the most visible source, but measures to support earned income and social benefits will also play a key role. Milder expected inflation will also help, but this factor could be reversed, especially if the current upturn in oil prices continues.
According to the first INSEE’s estimate, real GDP growth remained stable at 0.3% q/q in Q1 2019. This figure is in line with our expectations but it paints a mixed picture, an even more mixed one than during the two previous quarters.
Business confidence surveys are showing signs of levelling off. Hard data for January and February are rather positive. These factors are consistent with the economy keeping up growing at about 1.2%, which is our growth forecast for 2019. Although this is not very high, it is synonymous with the resilience the French economy is expected to show in an environment marked by uncertainties and downside risks. The main factor behind this resilience is the positive impetus of economic and fiscal policy, notably stimulus measures to boost household purchasing power, and the expected ensuing rebound in household consumption.
In 2018, according to preliminary INSEE estimates, France’s fiscal deficit narrowed by 0.3 points compared to 2017, to 2.5% of GDP. This is a good surprise compared to the government’s target of 2.7%. Mandatory levies and public spending both declined slightly as a share of GDP, by 0.2 and 0.4 points, respectively. The public debt ratio levelled off at 98.4% of GDP. Although the ratio has yet to decline, at least it did not increase either, for the first time since 2007. Thanks to the better-than-expected figure for 2018, the temporary slippage of the fiscal deficit above the 3% threshold in 2019 is likely to remain limited.
The French economy lost a lot of steam between 2017 and 2018, and the big question is whether it has returned yet above its potential. On the one hand, core inflation has barely increased, suggesting that the output gap is still negative. According to survey data, on the other hand, production capacity and factors are still under strong pressure, which suggests to the contrary a rather advanced position in the cycle. Although it is unclear whether the economy has reached on end-of-cycle phase, it is widely agreed that the external environment has deteriorated and is straining growth. The big fear is that the current slowdown could degenerate into recession in 2019, but we do not think this is the most likely scenario
The latest economic indicators all surprised favourably (positive z-score on the x-axis), reinforcing the global picture of a slow but resistant French growth and, consequently, our Q1 growth forecast of 0.3% QoQ.
According to the INSEE first estimate, French real GDP rose by 0.3% q/q in Q4 2018. This figure is not a strong one but this is still relatively good news as growth was slightly above expectations (surprising on the upside for the first time in 2018) and slightly above Eurozone growth (for the second quarter in a row).
2019 is getting off to a less strong start, with economic activity having taken a hit from the ‘gilets jaunes’ protest movement. The collapse in consumer confidence has been abrupt and the global environment looks less certain. Against this background, fiscal policy is being loosened: the new plan to support the purchasing power of lower income households, announced in response to December’s demonstrations, should help consumer spending to catch up, at least in part. It comes alongside measures already introduced in the 2018 budget to support consumers and companies. French growth is therefore likely to show signs of resistance.