Business climate in France back to normal

Bruno Cavalier, chief economist at Odo & Cie comments on the economic outlook for the French economy. 

In July, the business climate in France has almost returned to its long-term average after four years of more or less marked depression. With the exception of construction, this normalisation of business leaders’ sentiment could be seen min all sectors. This confirms that the recovery is ongoing and could strengthen, which would have a positive impact on unemployment at last. Growth in 2015 is set to exceed the official target of 1% by several tenths of a point. Unlike 2012, 2013 and 2014, the government did not need to have a corrective budget voted in the course of the year. Its deficit target for 2015 of 3.8% of GDP is sure to be reached. We would not be surprised if the figure were even a little better.

The fortnight’s focus
According to the INSEE surveys, the business climate in France continued to recover in July. The summary index for all sectors has risen 6.5% year-on-year, which is typical of a recovery. It is now just one point below its long-term historic average. This is the smallest gap seen since August 2011. At that time, the financing rates of the eurozone’s peripheral countries tightened sharply and suddenly, tipping the currency area back into recession. For France, the next three years were marked by a stagnation in real GDP and a rise in unemployment. These results confirmed, if there was any need, that we are in an upward phase of the business cycle in France and, more broadly, Europe (see myesterday’s Economic Note: “Buy Europe (part 2)”). They also suggest that the Greek crisis which has monopolised the attention of the media and the political arena so much
in recent weeks has not had a negative impact on business confidence or economic activity outside Greece.

What is the situation of France’s economy mid-year? To evaluate this, we use two simple nowcast growth models. One is based on a combination of confidence indicators and posts real GDP growth of 0.34% q-o-q in Q2 (i.e. 1.4% on an annualised basis). On the basis of end-quarter data, we obtain a similar figure in Q3. This is higher than the 1% forecast by the government. The other model uses industrial activity and household spending data and more accurately reflects the trends from one quarter to the next. It yields a more modest increase of 0.23% q-o-q in Q2. After an exceptional Q1 (+0.6%), growth is set to slow in Q2, but this result should be viewed in perspective. The French economy henceforth generates a pace of growth which, logically, should rapidly have a positive impact on the labour market situation.

The fortnight’s economic newsflow

-Vehicle sales rose sharply in June (+6.5% seasonally adjusted) to an all-time high since 2011 and around 10% higher than the average level for 2014.

– On 1 July, the European Commission approved France’s fiscal programme. With the definitive adoption of the Macron Economic Reform Bill on 10 July, we can assume the French government provided Brussels with what it wants in return for more time for reducing the public deficit. The government’s budget figures for the first five months of the year were published on 7 July. They pointed to a deficit of € 63.9bn, down vs 2014, despite a lag in tax revenues. Over 12 rolling months, the central budget deficit came to just under 4% of GDP, which is in line with the target of 3.8% at end-2015.

– Inflation remained stable at 0.3%year-on-year in June. It is only expected to rise in September thanks to less and less negative comparison base effects related to energy prices. In July, as was the case in January, the latest known inflation figure is particularly important because it is supposed to be used to calculate the interest rate on government-sponsored tax-free savings accounts. But rather than simply applying the calculation formula (inflation + 25bp, i.e. 0.5% at present), the government can choose the rate at its own discretion. When inflation is low, which should bring the rate down, the government is faced with the laughable conundrum of whether it should satisfy individual savers (incidentally, voters) or banks. Higher rates favour savers and penalise banks, and vice versa. In January, the government refused to follow the recommendations made by the Banque de France and left the interest rate unchanged. This time, it has resolved to lower it from 1% to 0.75%. We expect inflation to return to around 1% in December. The formula will therefore recommend a rate increase to 1.25%. As the elections approach, there is sure to be less reticence about increasing deposit costs for banks in order to please the holders of the livret A savings accounts (around 62m in 2014, with average savings of just under € 4000 per account).

–  In the preceding Focus-France published on 1 July, we examined how the Greek crisis was telling in terms of the long-standing ambiguity of the relations between French citizens and their elected representatives with EU institutions. The numerous twists and turns in the situation over the last three weeks only confirm these ambiguities, unwittingly adding a comical note. There were almost daily illustrations of the old French saying: “ridicule never killed anyone” After the resounding victory of the no in the Greek referendum of 5 July, the radical left, the far-right, a faction of the socialist party and the sovereignty-focused fringe of the right unanimously hailed this burst of democracy. Finally, the shackles of this technocratic Europe dominated by Germany imposing austerity on ordinary denizens would be thrown off. The rejoicing proved short-lived, as 48 hours later, Greece’s prime minister executed an about-turn and caved in to the conditions imposed by Greece’s official creditors. The other camp, that of pro-Europeans, was not lagging behind. Having outrageously dramatised the Grexit scenario, François Hollande expressed his delight at having saved the eurozone no less by opposing the German line and favouring a compromise which only re-starts a round of negotiations for which neither the outcome nor the cost can be estimated at this juncture. In an article paying tribute to Jacques Delors published on 19 July, the French president even expressed his satisfaction with the Franco-German entente and seized the opportunity to call for the creation of a European government with a specific budget.

Forthcoming events
–  The national accounts for Q2 are due to be published on 14 August. The June report on goods consumption (31 July) and that of industrial production (7 August) will already have been published, helping to help fine-tune the forecast indicated on page 1. INSEE is forecasting a 0.3% rise in GDP (after 0.6% in Q1), Banque de France is forecasting 0.2%. Barring any negative surprises, the average for the first half will, in any case, be higher than the levels recorded in 2014 (0%) and 2013 (0.1%).

–  It will soon be a year since the government was purged of its “rebels”, chief amongst which the Economy Minister Arnaud Montebourg. The latter hits the headlines occasionally: his most recent intervention is an invitation to former Greek Finance Minister Yanis Varoufakis to attend his summer university on 23 August. This will be followed by the summer universities of MEDEF, the largest entrepreneur network (26-27 August) and the socialist party (28-30 August).

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