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.
In 2019, we expect French growth to be lacklustre but resilient, the two traits that are often used to characterise the economy, thanks notably to measures to boost household purchasing power.
Roughly a year ago, economic pressures increased sharply – in the industry sector, the production capacity utilisation rate clearly surpassed its long-term average, and companies signalled major supply-side constraints and hiring difficulties (in industry, services as well as in construction) – raising the question of France’s position within the economic cycle[1].
More precisely, to what extent had the output gap closed (i.e how mature was the cycle and how close from the end)? And at what point would it begin to hamper growth?
Available signals were contradictory, making it all the harder to answer this question. In 2017, the output gap was already positive, and rather significantly so, based on the pressure indicators mentioned above, but it was still negative although not far from closing based on the European Commission’s traditional production function approach; and it was still fairly negative based on the low level of core inflation.
Our analysis at the time was that the French economy had moved out of the recovery phase into the expansion phase, in which the economy slows but continues to grow at a faster pace than the potential growth rate. We had probably reached peak growth, but the cyclical peak did not seem to have been reached yet and the end of the cycle seemed farther away.
Where do things stand today? The picture is not any clearer (the signals from various indicators are still contradictory) but our analysis has become less positive.
In a nutshell, French growth has lost a lot of steam, but it is still “under pressure”. It is not yet showing any of the obvious signs of overheating that typically mark the end-of-cycle phase, but it seems to be getting much closer than estimated one year ago. The inflation cursor, in contrast, has hardly moved at all and is still indicating an absence of pressures.
