Perspectives

2020: new year, same trends

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12  
EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
France  
2
020: new year, same trends  
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. On the domestic  
front, upside risks continue to stem from supportive economic policies while the tense social climate constitutes a risk on the downside.  
2019: false modesty  
1- Growth and inflation  
In Q3 2019, GDP rose 0.3% q/q, in line with expectations. This was  
the fourth out of the past five quarters in which growth hit 0.3% (the  
exception was Q4 2018, with growth of 0.4%). Nonetheless, it was a  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
small0.3% (0.27%), and marks a slight dip from the 0.4% average  
2
.4  
reported between Q3 2018 and Q2 2019.  
2.1  
1
.7  
Yet even more so than in previous quarters, this performance was  
not as mild as it might seem. It masks the 0.6-point contribution of  
final domestic demand, compared to an average contribution of 0.5  
points in the four previous quarters. Household consumption and  
business investment both rose slightly faster than in Q2, as the  
long-awaited rebound in the first gradually took shape, and the  
robust pace of the second was confirmed. Changes in inventory  
made a somewhat less negative contribution (-0.1 points, vs. -0.2  
points). These favourable trends were offset by a marked slowdown  
in household investment (after an exceptional surge in Q2) and the  
negative contribution of net exports (-0.3 points), reflecting a  
rebound in imports and another small decline in exports.  
1
.3  
1.3  
1.3  
1
.1  
1.2  
1.1  
21  
1
.0  
1
7
18  
19  
20  
21  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
- Business sentiment in France and Germany  
6
Manufacturing PMI Services PMI  
5
65  
60  
55  
50  
45  
40  
France  
Germany  
Q4 growth prospects are favourable based on the business climate  
surveys available till December. They suggest that growth will hold  
at the current rate of 0.3%. The INSEE composite indicator is  
holding at a Q4 average of 106, the same high level as in Q3 and  
Q2, while the Markit composite PMI rose slightly again to 52.2, from  
6
0
55  
5
0
5
5
1.9 and 51.3, respectively.  
The relatively favourable trends shown in French survey data in  
019 are noteworthy, especially compared to Germany (see chart 2).  
4
2
40  
The most striking difference is in the manufacturing sector, where  
Germany has slid deep into recession territory while France is still in  
expansion territory, if only by a little bit. Trends are also different in  
the services sector, for partly the same reason: since the French  
manufacturing sector did not experience the same troubles as its  
German counterpart, the services sector has remained in favourable  
territory in France, while following a “humped” profile in Germany.  
12 13 14 15 16 17 18 19 20  
12 13 14 15 16 17 18 19 20  
Source: Markit, BNP Paribas  
might be underway already. This brings us to the next question: the  
size of the ensuing rebound in growth, which we expect to be fairly  
mild.  
Returning to the outlook for Q4, our nowcast soft data-based model  
projects growth of 0.2% q/q, which dampens somewhat our positive  
interpretation of the survey results. Yet our model made a similar  
projection for Q3. Since Q3 growth proved to be slightly stronger, it  
is possible that our model is underestimating Q4 growth again. This  
underestimation is also suggested by our forecast using hard data,  
which is higher (0.5%). Yet this projection is fragile because it is  
based only on October and November data.  
In France, the two indexes were at roughly the same level at the  
end of the year (50.4 for manufacturing PMI and 52.4 for services  
PMI), whereas in Germany there was a 9.2-point spread (43.7 and  
52.9, respectively). This is only the second time the spread has  
been so wide since the great recession of late 2008-early 2009. The  
way in which this spread is absorbed will be one of the trends to  
watch in 2020. It is a key factor in our German scenario, with a  
ricochet effect on France. Our scenario calls for this differential to be  
absorbed on the upside, through an upturn in the business climate  
in the manufacturing sector. Based on the latest data, this process  
Like the INSEE, we are forecasting Q4 growth at 0.3%, while the  
Bank of France is a little less optimistic with an estimate of 0.2%. As  
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EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
to the breakdown of growth, we forecast net exports to make a very  
positive contribution (0.3 points), buoyed by the strong rebound in  
exports that has been observed in every fourth quarter since 2016 .  
It would be offset by an equally negative contribution of the change  
in inventory, as signalled in survey data. Final domestic demand  
would make a slightly less positive contribution than in Q3 (0.4  
points) due to a somewhat smaller increase in household  
consumption, a much lower increase in business investment,  
household investment and public consumption, and a comparable  
rise in public investment.  
3- Breakdown of growth  
Average annual growth rate and contribution to growth  
GDP growth Private consumption Public consumption Net exports  
Business investment Household investment Change in inventory  
,4%  
1
2
2,5%  
1,7%  
2,0%  
1,3%  
1,5%  
1,0%  
0,5%  
0,0%  
1,1%  
1
,0% 1,0%  
1,0%  
0,6%  
The strikes and demonstrations against pension reform, which have  
been ongoing since 5 December, risk eroding growth in late 2019  
and early 2020. Although the business climate in December was not  
affected, it is likely only a matter of time. Household confidence  
proved more sensitive and declined sharply for the first time in a  
year (-3 points). The negative impact of such strikes on the  
economy is channelled through an immediate fall in the  
consumption of transport services, which carried over to activity in  
retailing, hotel and food services, leisure activities and tourism. At  
refineries and ports, blockades have also caused disruption. Yet  
although the impact might be substantial at the sector,  
microeconomic or regional level, it is small at the macroeconomic  
level. Certain expenditures definitively fall by the wayside, but others  
are stimulated, substituted or postponed. To give an idea of the  
order of magnitude, the INSEE estimates that previous major strikes  
had a negative impact on growth of between 0.1 and 0.2 points. And  
whenever there is a negative impact, it is followed by a catching-up  
phase and extra growth.  
-0,5%  
1,0%  
-
2013 2014 2015 2016 2017 2018 2019 2020  
Source: INSEE, BNP Paribas  
purchasing power gains. In 2020, this lag will no longer come into  
play, or less so in any case. Even so, we still expect French  
households to remain cautious. Consumer spending is only  
expected to pick up a little (1.4% vs 1.2%). Yet the rebound could  
be much stronger given the size of purchasing power gains (about  
2
% in 2019 and 2020, according to our estimates).  
As to investment, in contrast, the conditions seem to have come  
together for a slowdown. The expected decrease in business  
investment will be partly automatic, after reaching a robust pace that  
looks hard to sustain. The mixed outlook for demand would also  
play a key role, and to a lesser extent, fewer pressures on  
production capacities. Favourable financing conditions should help  
buffer the slowdown. Public investment would suffer a payback as  
In 2019, the average annual growth rate adjusted for the number of  
working days is estimated at 1.3%, compared to 1.7% in 2018.  
While definitely a sharp slowdown, it is nonetheless misleading  
because, on the one hand, it masks the major contribution of final  
domestic demand, which rose to 1.8 points, from 1.3 points the  
previous year. The lower growth in 2019 can be attributed to the  
more negative contribution of the change in inventory (-0.4 points vs  
2
the municipal election cycle comes to an end . Household  
investment would get a small boost from the strong momentum of  
the existing home sales market, although it would continue to be  
limited by sluggish activity in the new home sales market.  
Export growth would remain mild in keeping with sluggish global  
demand. France is expected to maintain its (feeble) market share,  
as it has since 2013. It can count on its strengths (aeronautics,  
pharmaceutical products, luxury goods, cosmetics, agro-food and  
automobile equipment) and a favourable exchange rate.  
-
0.3) and net exports more normal contribution (-0.1 points instead  
of +0.7). On the other hand, French economy is not slowing down  
as sharply as the Eurozone average (1.1% vs. 1.9%) or Germany  
(
0.6% vs. 1.5%).  
2020: basically the same refrain  
All in all, we forecast growth at 1.1% in 2020 (1.3% using data  
unadjusted for the number of working days). This small slowdown  
compared to 2019 is not significant in our eyes. It masks a slight  
acceleration in the quarterly growth profile. Growth will continue to  
outpace the forecast for the eurozone (0.8%) and Germany (0.4%).  
We see 2020 as a year of consolidation: consolidation of the  
positive impact of purchasing power gains on household  
consumption, and in general, consolidation of the positive expected  
effects of recent reforms.  
Broadly speaking, 2020 is likely to repeat the same refrain as in  
019: feeble but resilient growth. The growth engines will not be the  
2
same, however. Under our base case scenario, the contribution of  
household consumption (0.7 point vs 0.6 in 2019) will surpass that  
of total investment (0.5 points vs 0.8), which is a more customary  
configuration for the French economy.  
All of the conditions seem to have come together for a bigger  
increase in household consumption: rising confidence, major  
purchasing power gains (lifted by job and wage growth, tax cuts and  
mild inflation) and dynamic lending at attractive terms. Yet the real  
question is just how much bigger. In 2019, all of these conditions  
had already come together, yet the rebound was still mild, partly  
because there is a certain lag before households react to bigger  
2
INSEE, Municipal election cycle: what impact on public investment,  
1
INSEE, French quarterly exports depend heavily on the aeronautics and  
employment and production?, article pp 33-45, Note de Conjoncture,  
naval sector, box pp 58-60, Note de Conjoncture, December 2019  
December 2019  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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