Macron-nomics continue to reshape France’s economy
Summary: The disappointing Q4 print is likely to be a one-off as the fundamentals of the economy remain very well-oriented. In 2020, we expect that GDP growth will reach 1.1%, mostly fueled by household consumption. Investment should play a smaller role as driver of economic activity.
2019 growth is subject to upward revision: The disappointing Q4 print (-0,1% vs expected 0.2%) is due to the combination of destocking and slowdown in household consumption linked to less energy spending and the impact of the strikes in December. This brings 2019 GDP growth down to 1.2% instead of the expected 1.3%. We can’t exclude that 2019 GDP growth may be revised upwards by the INSEE as was the case the last two years. In 2017, GDP growth was revised from 1,9% to 2,3% and in 2018 from 1,5% to 1,7%. The last quarter is usually volatile and subject to large revision, especially in period of social unrest. We are still confident about France’s growth in the coming years as the economy shows resilience both cyclically (private consumption and CAPEX added +0.5 and +0.3 percentage point to growth) and structurally (good demographics and capital).
Consumption is expected to be the main driver of growth in 2020: The carryover for this year, at the end of 2019, is just 0.16% which is a very weak start for 2020. However, we expect that growth momentum will improve in coming months on the back of strong household consumption. In the past three years, the main driver of economic activity was investment, but it should be consumption in 2020. We already see positive signs confirming this trend: purchase of durable goods has increased by 2.5% since June 2019 and the consumer sentiment index rose by two points in January 2020, almost erasing the decline of December linked to the strikes. Household consumption should be stimulated by continued labor market improvement, higher wages, easy access to credit (bank loan growth has evolved without any interruption above the stunning level of 5% YoY since July 2018) and fiscal stimulus increasing purchasing power (Council tax being gradually abolished and rate for first tax bracket being lowered from 14% to 11%). On the contrary, investment should be less supportive to growth due to lower private investment forecasts for 2020 and slowdown in public investment, which typically happens in period of municipal elections.
Leading indicators confirm the economy is on the right track: We monitor closely the evolution of the INSEE’s business climate (Chart 1) as it is a better predictive indicator of France’s economic activity than Purchasing Managers Index (research paper published by the Treasury in March 2013, only available in French). The latest data confirm that growth remains broadly well-oriented. We don’t see any manufacturing weakness contagion to the service sector and the construction sector, which is usually used to identify turning points in the business cycle, is still at an elevated level (111.3 in January).
The labor market is showing great signs of improvement: Unemployment is receding at a 10-year low and more than 500,000 jobs have been added to the economy since 2017, including 260,000 in 2019, which is quite an exceptional performance. France is also experiencing an industrial renewal, which was basically impossible to imagine a few years ago, with the creation of 24,000 jobs since 2018. One of the best indicators to track in order to asset the health of France’s labor market is the share of CDI (open-ended contracts) in new hiring (Chart 2). It is currently standing close to its highest level since Q1 2001, at 49.2%. Taking into account company size, the most impressive trend concerns the share of CDI in new hiring by small companies (0 to 19 employees) which is skyrocketing at 51%. Macron’s policies to cut tax on companies and investors and made hiring and firing easier via changes to labor laws have undoubtedly restored investors’ confidence and helped boosting growth. We expect that the positive trend will continue in the labor market in 2020, but Macron’s promise to lower unemployment to 7% by the end of his terms in 2022 remains a far-reaching goal mostly due to skills mismatches. According to the latest INSEE survey, 20% of French companies said they face persistent skilled labor shortage. The professional training system and apprentice reform of September 2018 will undoubtedly help tackling this issue, but it will take time before it has really an impact on structural unemployment.
Macron’s pension reform will be fairer: Macron’s left-wing inspired reform will reduce inequalities between the highest and the lowest pensions and, at the same time, it will push to work longer in order to have full retirement benefit. According to the report released by the Council of State on the impact of the reform, pensions will grow on average by 29% for the poorest while pensions will only increase on average by 1% for the wealthiest. The trade unions and the employers’ organizations have until the end of April to find a middle ground in order to guarantee financial balance of the pension system. Trade unions favor an increase of employers’ contribution but this solution has already been ruled out by the government due to its negative impact on labor cost. In case an agreement is not reached within the allowed time, the government is likely to move forward with raising the retirement age to 64.
Upcoming legislation: After discussing with influential MPs, we know that the Parliament is working on a bipartisan legislation backed by the Socialist Party and members of the LREM parliamentary group to renationalize the highway network. The law proposal could be presented for debate in Q4 2020, but is unlikely to be supported by the government as things stand. There is also an emerging debate regarding increasing tax inheritance on assets and cash above €500,000, which would concern only a small percentage of the population. Talks are at a very early stage and could conduct to a law proposal in early 2021 in the best case scenario.
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