Cyclical indicators are still flashing green
Growth and inflation
Robustness of non-farm payroll employment After a preliminary estimate of 0.2% q/q, the second estimate of Q2 2019 growth was revised upwards to 0.3% q/q, in line with expectations. Since Q3 2018, growth has not been very strong but remarkably stable and more solid than it appears at first glance: indeed, it relies on an average 0.4 percentage points contribution of final domestic demand. Hopes of a rebound in household consumption were dashed again in Q2 2019, as it rose by only 0.2% q/q after 0.3% in Q1. This bad news was nonetheless offset by good news on the investment front, with business investment accelerating to 0.9% q/q from 0.6%, and surprisingly strong household investment, up 0.8% q/q from 0.1% q/q. Changes in inventory and net exports moved in opposite directions again, with the former making a negative contribution of 0.2 points (after +0.3) and the latter a positive contribution of 0.1 points (after -0.3). The change in the contribution of net exports can be attributed to imports (-0.2% q/q following +1.1%) while exports remained sluggish (0.0% q/q following 0.1%), strapped by an unusually sharp decline in service exports.
Q3 growth prospects are still looking positive based on business confidence surveys available through September. Survey results suggest that growth will hold at the same pace as in the two previous quarters. On average, the INSEE composite index for Q3 held at the same high level as in Q2 (106), while the Markit composite PMI was slightly higher at 52 (from 51.3). The upward trend of these surveys since the beginning of the year, as timid as it may be, is another encouraging sign, as is the fact that weaker signals from the manufacturing sector have failed to spread to services for the time being. Lastly, consumer confidence is sending the most positive signal of the confidence surveys. In September, consumer confidence increased for the ninth consecutive month to 104. This score is sufficiently higher than the average reference point of 100 to consider that French households are no longer “less pessimistic” but “more optimistic”. Particular satisfaction can be expressed regarding the significant decline in fears about the evolution of unemployment.
Our nowcast model puts a damper on this positive interpretation of the survey results. Based on these soft data, Q3 growth is estimated at 0.2% q/q[1]. This is in line with our growth forecast, while the INSEE and the Bank of France are estimating Q3 growth at 0.3% q/q. The reason we are somewhat less positive about this quarter and the next ones as well (we have lowered our 2019 and 2020 growth forecasts by 0.1 and 0.2 points, respectively, to 1.2% and 1%[2]) is our fairly negative analysis of Germany’s economic situation (see article in this publication), which spills over to French growth via the export channel.
Green budgetingWe also expect business investment to drop sharply in the face of uncertainty, whose negative influence will be larger than the favourable impact of the currently loose financial and monetary conditions. Although the business confidence survey in the wholesale sector is not showing any early warning signs of such a deceleration in business investment, the balance of opinions about investment are more mixed in the services sector. Moreover, in July, industrial business leaders revised sharply downwards their investment expectations for 2019. Moreover, after peaking in early 2018, capacity utilisation rates have also fallen by a little more than two points to 83.4%.
Since household consumption has still not picked up, we have also revised downwards our expectations. The latest monthly figures for household consumption of goods in August hardly showed any signs of a rebound. Consumption of core manufactured goods is not a lot more vigorous (transport equipment, residential goods, clothing and other goods). Even so, a rebound still seems like the most probable hypothesis, especially given the recent upturn in household confidence and new government measures to boost household purchasing power in the 2020 budget.
Support from the labour market
The buoyant labour market is both a cause and a consequence of the observed and expected resilience of French economic growth. The labour market’s strength can be seen above all in the number of job gains, which continues to be surprisingly strong. The growth of private sector payroll employment is only slightly lower than the pace of GDP growth (1.3% in Q2 vs. 1.4% in year-over-year terms). This relatively robust momentum is accompanied by tensions (hiring difficulties, labour shortage) which, though no longer rising, are still strong. The upward pressure this tends to put on wages, however, has been limited so far, for a part because of the feeble labour productivity gains arising from the job-rich nature of growth. According to the DARES, this might also reflect the nature of labour market tensions: “higher pressures seem to be largely due to high job turnover rates in certain very labour-intensive sectors for low-skilled workers, such as construction, personal services and food & hotel services”[3].
Unemployment statistics also reveal the robust nature of the labour market. The unemployment rate, which has fallen continuously since mid-2015, dropped to 8.5% in Q2 2019, the lowest level in ten years. Apparently, this is not only a cyclical decline. According to the DARES, the structural component has also fallen thanks to the reforms undertaken in recent years, notably to reduce the cost of labour.
