The last couple of days have seen a flurry of data about the economy of la belle republique and so let us take a look at what is taking place there. Before I do so it would be remiss of me not to express my sympathies to the friends and relatives of those affected by the Airbus 320 crash in the French Alps. The theme that has developed over the past 3 years or so is of an economy struggling to come to terms with the post credit crunch era with flatlining economic growth. Such have been the struggles that I wondered back on December 11th how near France was to actual deflation and disinflation which I define as a contracting economy combined with falling prices. Also on February 13th I pointed out that France was being outperformed by Germany leading to quite an economic divergence at the heart of the Euro project which of course only adds to the problems to be found elsewhere.
What about deflation and disinflation?
According to the official data France escaped the former at the end of 2014 by the skin of its teeth.
In Q4 2014, GDP in volume terms increased by 0.1%. Over the year, GDP rose by 0.4% as in 2013.
So very weak growth but at least there was a flicker of it. Whilst price changes were volatile in January and February due to the winter sales we can say that France is experiencing some disinflation.
Year-on-year, consumer prices diminished again (—0.3% after —0.4% in January).
Like many other places there is a clear split between goods prices which are seeing disinflation and services prices which are seeing inflation. For example manufactured product prices are falling at an annual rate of 1.5% but services prices are rising at an annual rate of 1.3%. Part of the latter is something which will be grim news for those holiday makers looking to take advantage of recent UK Pound Sterling strength.
This rise came mainly from prices of services related to winter holidays: prices of holiday accommodation services rose strongly in February 2015 (+22.3%). Vacation rental tariffs (+1.3%; +4.4% year-on-year),
What about the fiscal deficit and national debt?
This morning’s official data had a good news and bad news mix so let us start with the good. From the Financial Times.
The French deficit narrowed faster than anticipated to 4 per cent of gross domestic product in 2014, from 4.3 per cent the previous year,
So France reduced its fiscal deficit in 2014 albeit marginally. But the news about the national debt showed a further deterioration on the same basis. From the French Statistics Agency.
At the end of Q4 2014, the Maastricht debt reached €2,037.8bn….. As a share of GDP, it accounted for 95.0 %,
It slipped their minds to point out that this was up on the 92.3% of 2013. If we make a cross-channel comparison then the fiscal deficit in France is some 1% per annum better but the national debt is some 9% larger relative to economic output. On current trends that balance is likely to continue the UK because of its present faster rate of economic growth.
Comparing the national debt to revenue is problematic as revenues at 53.2% of GDP are much higher than tax revenue at 44.7% of GDP. Is anybody aware of what the other 8.5% of GDP is?
Does this matter?
In terms of a capital and thus long-term affordability issue yes it does but in the shorter term it matters much less due to the actions of the Bank of France. It has been operating the Quantitative Easing operations of the European Central Bank with such enthusiasm that some have thought it has bought too much (18 billion Euros) so far! More likely is that the numbers stated also include French private-sector debt.
This means that it is extraordinarily cheap for France to offer new sovereign debt. The ten-year yield is a mere 0.45% and at the two-year maturity investors are paying France 0.15% per annum to buy its debt! That is dangerous as it may be tempted to issue shorter-dated debt when a time like this is an opportunity to issue longer-dated bonds. Also it makes quite a mockery of the ratings agency downgrades that have taken place.
Back on the 11th of December I suggested that France should receive a boost from lower oil prices.
As France imports an estimated 1.7 million barrels of oil a day (US EIA) then it will benefit substantially from the falling oil price and similar if smaller gains will be made via gas imports.
Of course last nights military action in the Yemen by the Arab League has pushed the oil price higher but compared to a year ago it is much lower. Also monetary policy is very expansionary with the Euro lower against many currencies symbolised by its fall from nearly 1.40 to 1.10 versus the US Dollar. Today’s money supply numbers show that narrow money is growing very fast although it is a moot point as to how much is reaching the areas which most need it. But the bottom line is that the outlook for 2015 should certainly be favourable.
What data are we seeing?
This has so far disappointed. From Reuters.
The Labour Ministry said on Wednesday that the number of registered job seekers in mainland France rose by 12,800 last month to 3,494,400, up 0.4 percent over one month and 4.6 percent over one year.
This is disappointing and is the current French economic Achilles heel as the level of unemployment is not only elevated but looking rather persistent.
Even the official survey of business trends known for its optimistic slant seems to be continuing to struggle.
The indicator, compiled from the answers of business managers in the main sectors, has moved upward, from 94 to 96, after being stable during three months. It still lies below its long-term average (100).
So better but still not even average. Indeed in spite of the currency depreciation it is being held back by the manufacturing sector something which is reinforced by yesterdays purchasing managers report.
Flash France Manufacturing Output Index climbs to 47.1 (47.0 in February),
As 50 is the benchmark for unchanged we see that manufacturing continues to contract. This means that overall the expectation for the opening quarter of 2015 is as follows.
the surveys are signalling a mere 0.2% expansion of the French economy in the first quarter
Not much in the circumstances is it?
There are optimistic signs for the French economy as I have discussed above. However the further rise in unemployment was symbolic of a situation where any growth has so far been marginal, nascent and weak. A bit like the history of Portugal and Italy where even in the good times economic growth struggled leading them into their current malaise. Let us hope that Bonnie Tyler was not right about economic growth in France.
I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning
As I stood there in the morning rain
I had a feeling I can’t explain
I was lost in France in love
Meanwhile by contrast Spain seems to be continuing to benefit from the positive effects of disinflation that I discussed on the 29th of January. According to the Bank of Spain economic growth in the first quarter of 2015 was 0.8%. Quite a difference is it not?
Share Radio at Lunchtime
I will be on the Global Perspectives show on Share Radio after the 1pm news today. A clear subject after today’s Spanish data and indeed the UK Retail Sales numbers is how lower prices are boosting economic growth as per my article of the 29th of January. I did tweet Duncan Weldon of BBC’s Newsnight program to suggest that they should be covering this but apparently they were ahead of everyone or something like that.
we have been!