Credit Impulse Update: The party is over, France’s GDP is out
Head of Macro Analysis
In our last note about the French economy published in March 2018, we warned against the risk of economic slowdown as a result of contraction in credit impulse and higher rates and higher oil prices. The latest statistics, especially Q2 GDP growth that was out today at 0.2%, seem to confirm this risk and the fact the peak in growth during this cycle was reached in Q4 2017. We expect a pronounced economic slowdown this year with a growth rate around 1.6%-1.7%, which is way below the government’s target (2%). Actually, the biggest threats will start to materialise in 2019, potentially leading to a sharper downturn. We identify three major risks: the potentially negative reaction of financial markets to monetary policy tightening, rising protectionism and the likely increase in oil prices due to the lack of investment in this sector in recent years.
Leading indicators point to lower growth
The growth rebound from 2014 was largely fuelled by strong credit pulse (highest point of 3.9% of GDP reached in Q2 2015) which happened concomitantly with a miraculous alignment of stars for the economy (low rates, low oil prices and weak euro). Now that this impulse has turned down (our proprietary credit impulse comes out at only 0.4% of GDP in Q2 2018), the direct consequence we can expect is a negative shock on confidence, domestic demand and, ultimately, growth.
Explanation: The Credit Impulse indicator developed by Saxo Bank leads economic activity by 9 to 12 months. It represents the flow of new loans issued by the private sector as a percentage of GDP. France’s credit impulse is calculated using credit data from the Bank of France and data on economic activity from INSEE.
In addition, lower PMIs since the beginning of the year tend to confirm the low-growth scenario. For the first time since September 2016, the contraction of new export orders in July is a warning sign that should not be overlooked. It seems that the French economy is starting to feel the adverse effects of rising NEER, which is close to its 2009 peak, even though REER remains relatively low.
We also foresee that a lasting level of a high unemployment rate, reflecting the persistent mismatch between business needs and jobseekers’ qualifications, will constitute a negative factor for consumption. Long-term unemployment increased 7% YoY, while the rate of people who have been jobless for less than a year is declining, which confirms the need for the reform of vocational training promoted by the government. However, it is expected that virtuous effects will take several years to materialise in the labour market.
The Macron effect tends to disappear
In previous months, we talked a lot about the Macron effect. As a matter of fact, it is fading as fast as it appeared. There has been a sharp decline in consumer confidence, partially driven by the negative impact of the government’s fiscal measures, a collapse in the approval rate and lower business confidence from its Q4 2017 peak, though it seems to be more resilient than consumer confidence.
Back to normal for the French economy
In a way, France’s growth is back to a more normal level taking in consideration its economic fundamentals and its level of potential growth, which is estimated at 1.25% by the Treasury for the period 2017-2020. Basically, a key problem of the French economy is that its recovery was slightly desynchronised with the global economic cycle. It started later than in most European countries and, thus, might be shorter since France will be hit at the same time that the other countries when the next downturn, that could take place in 2020 in the US, will happen.
From 2019, France will face major headwinds: lower global trade, as indicated by leading indicators, such as YoY South Korean exports, and likely higher oil prices as a consequence of under-investment in this sector in recent years. To sum up, France’s optimism that emerged one year ago did not last long. Unfortunately, France's World Cup win will not bring any support to growth.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.