Growth is benefiting from internal supports

EcoPerspectives // 4 quarter 2018  
Growth is benefiting from internal supports  
After a market soft patch in the first half of 2018, growth in France will probably get some colour back in the second part of the year,  
despite a less supportive external economic environment. Consumer spending should get a boost from tax cuts and increases in  
social minima planned for the end of the year. This positive impact is expected to last into 2019, buffering the growth slowdown.  
Other fiscal stimulus measures will also be at work, and the first results of the labour market reforms and the ‘PACTE’ growth and  
business reform act could start to show up.  
Weak growth in the first quarter of 2018 continued into the second,  
with GDP again rising by only 0.2% q/q. Consumer spending, which  
was already weak in the first quarter, growing just 0.2% q/q, due  
notably to tax increases, saw a small decline in the second quarter  
1- Growth and inflation  
GDP Growth (%)  
Inflation (%)  
-0.1% q/q), related to strikes on the railways and airlines and to  
mild weather that hit energy consumption. The marked slowdown in  
growth in household investment in the first quarter (from 0.7% q/q to  
.3% q/q) also turned into a contraction in the second (-0.1% q/q).  
These negative trends offset the slight uptick in public consumption  
from 0.1% to 0.2% q/q) and the more substantial rise in investment  
both in the public sector (from 0.1% to 0.5% q/q) and even more so  
by business (from 0.1% to 1.2% q/q). This resulted in an identical  
contribution to growth of final domestic demand in both quarters, at  
Source: National statistics, BNP Paribas  
.2 points, whilst the contributions from net exports (from +0.1% to  
0.2%) and changes in inventories (from -0.1% to +0.2%) were  
mirror images of each other. After their drop in the first quarter of  
.4% q/q, exports struggled to recover, gaining 0.1% q/q, whilst  
At the time of writing, however, the rebound cannot be taken for  
granted, particularly given the downward trend in consumer  
confidence and, more precisely, consumers’ worsening view of  
prospects for their personal financial positions and the standard of  
living in France (chart 2). This deterioration is concerning as it  
shows no trace of the expected improvement in consumers’ view of  
their prospects resulting from coming fiscal and spending measures  
that will have a favourable impact on their purchasing power from  
October. Although the improvement in the labour market has slowed,  
it is still going on but again this seems not to be feeding through into  
the consumer confidence figures. The downward trend in consumer  
confidence does not appear to fit either with the strength of growth  
in bank lending.  
imports, which had recorded a bigger drop in the first quarter (-0.6%  
q/q) also produced a bigger recovery in the second (0.7% q/q).  
The rebound goes ‘all-in’  
The disappearance of the one-off factors that held back growth in  
the second quarter suggests that a rebound is possible in the third.  
We expect growth of 0.5% q/q, in line with forecasts from INSEE  
and the Banque de France. Growth will also be boosted by the one-  
off factor of a 31% m/m increase in new car registrations in August,  
in anticipation of changes to standards on 1 September, although  
the positive effects of this will be attenuated by a corresponding run-  
down in inventories. The positive results of the tourist season should  
also support growth.  
One possible explanation for this is that energy-led inflation is taking  
a bite out of purchasing power. It is also possible that lower  
consumer confidence reflects the announcement in August of partial  
The picture painted by surveys of business confidence is somewhat  
more mixed: these have arrested their downward trend of the first  
six months of the year, but only barely stabilised between July and  
September, albeit at a level that remains high and consistent with  
quarterly growth of around 0.5%. Our nowcast model predicts 0.4  
q/q growth on the basis of survey data and 0.7% q/q on the basis of  
economic activity data.  
de-indexing of pensions, family benefits and housing support .  
French people would therefore demonstrate a problematic  
asymmetry in their reactions, proving sensitive to unfavourable fiscal  
measures but not to favourable ones, despite the fact that the latter  
are worth a larger amount than the former (according to government  
We expect this rebound to continue, and even to gather a little pace,  
in the fourth quarter, with growth reaching 0.6% q/q. This stronger  
growth will come in part from the expected positive impact on  
consumer spending of tax cuts and increases in social minima, and  
in part from the expected sharp rise in major export contracts.  
Instead of increasing in line with inflation excluding tobacco (expected by the  
government to be 1.3% in 2019 and 1.4% in 2020) increases in these benefits  
will be limited to 0.3% in 2019 and 2020.  
EcoPerspectives // 4 quarter 2018  
figures) . Another factor may have contributed to depress consumer  
confidence in September: the debates on the introduction of the  
withholding income tax on January 2019, and the concerns that this  
might cause a negative psychological shock on purchasing power  
and consumer spending.  
- Pessimistic consumers  
Synthetic indicator of consumer confidence  
Balance of opinion on prospects for:  
… unemployment ▪▪▪  personal financial situation  
standard of living in France  
Gauging these various positive and negative factors, we  
nonetheless believe that the odds favour an upturn in consumer  
confidence and spending over the next few months. The scale of  
such a rebound remains moot, because of the negative elements  
identified above, but in view of the existing sources of support, it  
would be highly surprising if it did not come at all.  
st. dev. from mean  
2019: a limited slowing of growth  
In 2019, growth is likely to maintain a solid pace at around 0.4% per  
quarter, but will lose some of the vigour regained in the second half  
of 2018. Next year the economy will face a number of headwinds,  
risks and uncertainties on the international front: trade tensions, an  
expected slowing of US growth, difficulties in a number of emerging  
economies, Brexit, and Italian economic policy. Export growth will  
be limited to 3.6%, putting it well below the expected 4.3% rise in  
imports. The strength of imports is a sign of good growth in  
domestic demand (+1.9%) but the contribution of net exports will  
nevertheless be negative, at 0.3 of a point.  
010 2011 2012 2013 2014 2015 2016 2017 2018  
Source : INSEE, BNP Paribas  
growth, which we expect to pick up pace and will get an additional  
boost from the expected increase in overtime following its  
exemption from employee contributions from September 2019. As  
far as financial income is concerned (6% of GDI), we expect them to  
continue to grow strongly. Regarding welfare payments (slightly less  
than one-third of GDI), growth will be held back by the expected fall  
in unemployment and by the discretionary measure of partial de-  
indexing while increases in other areas of welfare will act as a  
support. As far as tax and social security contributions are  
concerned (these currently account for nearly 30% of GDI), we  
expect a slight fall on average over the year, a development that is  
so rare as to be worthy of note. Turning finally to inflation, two of the  
three main trends from 2018 will continue into 2019: higher tobacco  
and fuel duties and an upturn in core inflation (1.3% in annual  
average terms, after 0.9% in 2018 and 0.6% in 2017). But and this  
makes all the difference  rising oil prices are expected to reverse,  
taking inflation down with it. As a result we expect annual average  
inflation to fall from 2.1% to 1.6%.  
On the domestic front, or for consumer spending to be more precise,  
we expect the positive trend of the second half of 2018 to continue  
with consumption growth of 2% (from 1.1% in 2018), driven by the  
strength of purchasing power gains (2.2%, from 1.1% in 2018). This  
will be driven first by strong prospects for growth in earned income  
which accounts for nearly three-quarters of gross disposable  
income [GDI]). Granted, growth in total employment will slow, due to  
weaker growth and a reduction in the number of subsidised  
contracts. But this slowdown is likely to be limited by the expected  
positive effects of a switch from the competitiveness and  
employment tax credit to lower employers’ contributions, enhanced  
from October 2019 by a further cut at minimum wage levels.  
Reforms of labour law and the introduction of a law reforming  
apprenticeships and professional training could also begin to have  
an impact. In addition to the strength of employment, there is wage  
The expected slowing of growth in business investment (from 4.4%  
in 2017 to 3.5% in 2018 and 2.7% in 2019) is another significant  
component of our scenario. This reflects the high current level of  
uncertainty but comes with a degree of upside risk given that  
numerous positive factors could, at the end of the day, have greater  
weight: improving financial situation for companies; favourable  
financing conditions; high capacity utilisation rates; business tax  
cuts; cash effects from the shift from the competitiveness tax credit  
to contribution reductions; a new accelerated depreciation regime.  
Stimulus: EUR 11.1 bn  
Consolidation: EUR 7.1 bn  
Partial de-indexing of certain social  
security benefits for around  
EUR 3 bn  
Increases in minimum old-age benefit,  
allowance for adults disability and in-  
work bonus for around EUR 2 bn  
Reduction of a further one-third in the  
housing tax for 80% of households for  
EUR 3.8 bn (EUR 3.2 bn in 2018)  
Full effect of the removal, in October  
Real-time housing benefit payments  
for around EUR 1 bn  
Narrowing of the CITE energy  
transition tax credit for EUR 0.8 bn  
Growth in France does not lack for sources of support: fiscal stimuli  
are backed by numerous reforms whose effects will only be felt over  
the long term, but which send an immediate positive signal (such as  
the PACTE growth and business reform act). Under our scenario,  
French growth does not avoid the global slowdown between 2018  
and 2019. But these internal tailwinds help it to decelerate much  
less so than the Eurozone, by 0.1 pts (from 1.7% to 1.6%) versus  
018, of employee unemployment and  
health contributions for EUR 4.1 bn  
Exoneration of overtime work from  
employee social welfare contributions  
from 1 September 2019 for EUR 0.6 bn  
Increases in tobacco taxes (net of  
behavioural changes) for  
EUR 0.4 bn (EUR 0.6 bn in 2018)  
(EUR 2 bn over a full year)  
Introduction of the single flat rate tax on Increases in energy taxes (impact  
capital income for EUR 0.3 bn  
EUR 1.6 bn in 2018)  
on consumers) for EUR 1.9 bn  
(EUR 2.4 bn in 2018)  
.5 pts (from 2% to 1.5%).  
Smoothing of threshold effects for the  
General Social Contribution for low-  
income pensioners for EUR 0.3 bn  
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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