Head of Macro Analysis
Summary: Cheap money sparked recovery from 2014 but now a series of economic indicators suggests that France is moving inexorably into slowdown.
• Data about the business climate confirms a slower path of growth in coming months
• French GDP growth has been mainly driven by credit, which is less and less supportive
• Consumer stress is in red territory for the first time since 2014
• Lower growth will jeopardise the reform process and will have detrimental effects on the budget and spending
The consensus is that the disappointing GDP performance in H1 was just a slight hitch and that growth will rebound sharply in H2, as a result of measures to support purchasing power, such as lower residence tax for eight households out of 10 and the cut in social contributions paid by workers.
My analysis is a little different. These measures can help households in the short term but they will not change the trajectory of growth that will inexorably approach its level of potential growth, which is set at 1.2% according to the Treasury. Thus, after reaching 1.6% this year according to my calculations (versus 1.8% as stated by the government), I expect that France’s growth will fall around 1.4%-1.5% next year.
When we look at INSEE business climate indicator and its main components, it is difficult to see the beginnings of a recovery in economic activity. All seems to indicate that business leaders do not really expect it. Actually, we are facing a slow economic downturn following the sharp deceleration that took place between 2017 and 2018.
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.
The picture is not better when we look at household consumption which accounts for about 60% of GDP. Our consumer stress index is in high stress level for the first time since September 2014, mainly due to inflation-related components. The increase in the CSG (health insurance) and higher taxes on tobacco and fuels have had a negative effect on consumption and it cannot be ruled out that we will see a similar phenomenon at the beginning of 2019.
What we have learnt this year is that we should not neglect the impact of perceived inflation on consumption behavior. The consequences of withholding tax is, quite frankly, difficult to estimate. By contrast, higher green taxation from January next year (which represents about 55 billion euros over Macron's presidency) and higher oil prices could cause a new negative demand shock in the first quarter of 2019.
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.
The Macron effect has definitively disappeared. The structural reforms undertaken correspond to those that has been advocated for years by the IMF and other liberal international organisations. We can debate their effectiveness. One thing is certain: Emmanuel Macron’s presidency will be undermined by the slowdown in the business cycle, which is quickly decelerating. The growth peak for France was reached in late 2017, as for the rest of Europe, but the economic slowdown is much faster than in most of our neighbours that are showing an impressive resilience to ongoing risks. My fear is that lower growth will jeopardise the reform process and it will favour a short-term vision with regard to the budget and spending instead of focusing on France’s real problems.