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The sharp rise in household inflation expectations is one of the striking results of the April 2020 INSEE consumer confidence survey. This increase goes the opposite way of the fall in the balance of opinion on price trends over the past 12 months as well as in actual inflation. This large divergence is noteworthy in view of the usual relative proximity of the three indicators. This rise in expected inflation echoes the French people’s feeling, conveyed in the media, that significant price increases have occurred since the lockdown. This is probably the consequence of the composition effect of consumption baskets and not the warning sign of a widespread and substantial pick-up in prices in the making
Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive recessionary shock triggered by the Covid-19 pandemic. To date, the INSEE estimates the instantaneous loss of economic activity linked directly to confinement measures at 35%, which is equivalent to slashing off 3 points of annual GDP per month of confinement. In March, the business climate was in free fall, which gives us a first glimpse of its scope. A full arsenal of measures have been deployed to mitigate the shock as best possible. According to our estimates, French GDP could contract by 3.1% in 2020, more than the 2.8% decline reported in 2009, before rebounding by 5.4% in 2021. These forecasts are highly uncertain, with risks on the downside.
Judging by the indicators on our radar screen, the picture for the French economy is deteriorating, albeit, it should be remembered, from a relatively strong position...
In 2019, according to the preliminary INSEE estimate, France’s fiscal deficit came to 3% of GDP, which is good news, if only slightly better than the government’s target of 3.1% of GDP. The deficit widened by 0.7 points compared to 2018, the first increase since 2009. Attributable to the one-off fiscal cost of the transformation of the CICE tax credit into reduced employer contributions, the swelling deficit was expected to be only temporary, and would be followed by a substantial improvement in 2020. In the draft budget bill for the current year, the government was forecasting a deficit of 2.2% of GDP. Yet the Covid-19 pandemic has radically changed the situation. In the amended draft budget bill for 2020, presented on 18 March, the government is now forecasting a deficit of 3
Employment and unemployment figures for Q4 2019 and the year as a whole in France were surprisingly strong, especially since growth weakened markedly, despite showing some resilience. The preliminary Q4 2019 growth estimate fell well short of expectations (GDP contraction of 0.1% q/q), but private payroll employment (up 0.2% q/q, preliminary estimate) and the unemployment rate (-0.4 points to 8.1%) were far better than expected. Growth averaged 1.3% over 2019 as a whole – nearly a half-point lower than in 2018. Conversely, private payroll employment barely lost any traction (up 1.1% after a 1.2% rise), and the drop in the unemployment rate was slightly larger in 2019 than it was in 2018 (-0.6 points to 8.4%, after a 0.4-point decline in 2018)
According to its first estimate, Q4 19 US growth reached 2.1% q/q (saar), matching expectations. No bad news is good news. The fact that the growth rate is keeping pace with the two previous quarters (it has notably been its average pace since the start of the cycle mid-2009) can also be seen positively. Growth remains moderate however and its breakdown paints a mixed picture. In fact, the very positive contribution of net exports saves the day. But this positive contribution results from a negative evolution: the plunge in imports, also to be weighed against the very negative contribution of change in private inventories. On the personal consumption expenditures side, the significant deceleration was expected after two quarters of very strong growth
The economic indicators on our radar screen portray a French economy that is still looking rather strong and upbeat. In the recent period, most indicators are higher than their long-term and short-term averages, i.e. the momentum is slightly positive. Specifically, the signals from survey data (available through January) are more positive than hard data concerning activity (which are not as up to date, with November and December being the most recent months). A priori this augurs well for growth in early 2020...
The year 2020 is expected to follow along similar lines as in 2019, a mixed performance marked by slow but resilient growth bolstered by the strength of final domestic demand. The economy is expected to keep running at about the same rate (1.1% after 1.3%). The rebound in household consumption should gather steam, fuelled by major purchasing power gains. The dynamic pace of investment, which looks hard to sustain, is expected to slow, while sluggish global demand will continue to curb exports. The intensity of several external downside risks declined in Q1 2020, including trade tensions, Brexit, and fears of a recession in the US and Germany
Although not as significant as during the 2004-2007 boom period (+4.8 % per year on average), the dynamism of French business investment has nonetheless been noteworthy since 2014 (+3.4%). In 2018, its contribution to GDP growth (0.5 percentage points) was slightly above the one of household consumption (this latter lacking itself in dynamism) and in 2019, according to our forecasts, it would be barely below. The outcome of business investment being the main engine of French growth is very unusual. Its breakdown by products and its evolution over the time are also noteworthy: the current dynamism is based up to 40% on investment in information and communication services, far above all other products and twice as much as its share during the 2004-2007 period
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
