EcoTV Week

France: the "good accounts" of the French economy


French growth surprised on the upside in Q2 2023. Corporate margins increased and their cash positions remained supportive, allowing them to continue investing despite higher interest rates. Conversely, household consumption and investment contracted, despite gross disposable income and household purchasing power positive evolutions compared to a year ago. Households preferred to save more, with the rise in interest rates encouraging them to reduce their investments and purchases of durable goods: This lower demand should weigh on French growth, which we expect to be at 0.5% in 2024.


French growth was surprisingly up in the second quarter, reaching 0.5% q/q, and the quarter also saw an improvement in income.
Corporates benefitted from an increased profitability. The margin rate for non-financial corporates reached 33.2%, i.e. above its long-term average (32% over 20 years). The increase in sales prices thus supported profitability, notwithstanding the increase in costs. In parallel, INSEE surveys showed that companies maintained quite high cash positions, despite increases in costs, particularly those in energy.

Companies' financial situations therefore remain solid, which has enabled them to continue their investments. Their investment rate reached 26.1% on average over the last 12 months, i.e. 3 points above the average level over 20 years. As a result, companies have, in a way, transformed their favourable financial situation into growth.
This is not the case for households, despite a gross disposable income (GDI) growth (9.1% y/y) – income adjusted for taxation and benefits – above the consumer deflator increase (7% y/y) in the second quarter.

Behind this favourable dynamic, net compensations (which includes the variable pay) increased by 6.6%, which does not compensate for inflation. Capital income growth (+20.8%) was significantly higher thanks to both higher interest rates and higher corporate profits. This development greatly supported the increase in households purchasing power of 2% y/y in Q2 2023.

However, household consumption and investment have declined and household savings rate reached 18.8% in Q2 2023, the highest (excl. the Covid period) since 1979. And, savings can have two objectives: investing in a home or financial savings. Clearly, households did not make the first choice as their investment rate decreased. In parallel, financial savings reached a record proportion. Overall, in 2023, we expect financial savings to reach 8% of GDI, an unprecedented level.
Why? Households’ lower investment and durable goods consumption are well explained by higher interest rates. Their savings have seemingly increased due to a lack of opportunities for spending and not as a precaution, because, at the same time, few households fear unemployment. They are not expected to change their behaviour in the coming quarters as the ECB rate hike should continue to be passed on to domestic interest rates.

What does this household behaviour mean? Weak demand should drive down French growth and make it particularly difficult to achieve the growth objective underlying the next draft budget bill: 1.4% for 2024. Our growth forecast is 0.5%. So, "good accounts" don't always, as we say in French, make good friends.