France’s business cycle, measured by INSEE business climate indicator, has been closely tied to credit evolution in recent years. The European Central Bank's accommodative monetary policy, which resulted in abundant and cheap credit and a fall in the exchange rate, was decisive for the recovery of the French economy from 2014 onwards. This was much more important than the pro-business measures taken under Francois Hollande’s presidency, such as the temporary additional depreciation mechanism which, along with lower cost of capital, has substantially supported business investment.
The importance of credit to understand the evolution of France’s economic activity can be well observed with our credit impulse model, which represents the flow of new credit from the private sector as a percentage of GDP. It has peaked twice since the global financial crisis, in 2015 and in 2017, which corresponds to periods of very accommodative financial conditions that have fuelled GDP growth. Since the beginning of the year there has been a reversal of the trend, with a contraction of credit impulse in Q1 and a sluggish trend in Q2 with our indicator running at only 0.5% of GDP. Such a level is a clear signal of slowdown in economic activity. This trend is here to stay due to the combined effect of the ECB tapering and the overall rise in interest rates, which itself will increase France’s budgetary constraints. As a gentle reminder, France’s lower deficit is largely explained by the fall in interest rates in recent years and not by a real drop in spending.
Finally, the labour market is also showing signs of fragility. This is not just the consequences of external factors (the rise in oil prices), since other European countries are showing better resilience (especially Germany) and their labour markets are doing much better. In the first part of 2018, France has had three times fewer job creations than the European average. In the space of just nine months, job creation has plummeted from 112,000 at the end of 2017 to only 34,800 in Q2 of this year.
We're also starting to see a higher number of people anticipating a rise in the unemployment rate in the next 12 months, as surveyed by INSEE, which marks a clear break with the downward trend initiated since 2015. This mixed picture of employment questions the effectiveness of the structural measures that have been taken and, above all, their ability to reassure business leaders and employees alike.