Is there trouble ahead for the economy of France?

Last night saw the end of the European Championship football tournament in France and let me say congratulations to Portugal on its first major tournament victory. David can indeed beat Goliath. Whilst I can see clear economic gains for France from hosting the tournament for example from the extra tourism the UK experience post Olympics and post the claims of “Olympics Legacy” does make me wonder how the net position settles after costs. The pictures of the Athens Olympics site and the decline there brought that into focus. However if we look to the bright side the economy of France grew by 0.6% in the opening quarter of 2016 which followed two successive quarters of 0.4% so its best performance for a while. Also the fall in the UK Pound £ against the Euro will strengthen the relative size of the French economy compared to the UK in that currency.

Bank of France

However the picture of improving economic prospects has been undermined somewhat by the usually optimistic Bank of France this morning.

According to the monthly index of business activity (MIBA),
gross domestic product would grow by 0.2%
second quarter 2016 (third estimate, unchanged).

That is not in line with the previous better trend so let us take a closer look.

Services rose in June but the pace was
moderate…..In June, industrial production increased very
slightly……..In construction, activity declined in June,,,,, after a strong rebound in May.

The actual indicators have been around for a long time and can be compared to a long-run benchmark of 100.

In industry, ICA * stood at 97 in June as in May.
In services, the ICA * stood at 97 in June after 98
may.
In the building, ICA * stood at 97 in June, as
may.

So growth below the long-run position is what we are being told which returns us to the disappointing fall back after a better phase.

What about the private business surveys?

This morning we were told this by Markit.

Business confidence in France has fallen back in the latest outlook survey, having previously improved to a two-year high in early-2016. Moreover, the expected pace of activity growth remains sub-par among the major European economies,

If we look into the detail we see that the situation has deteriorated generally.

Weaker sentiment is signalled in both the manufacturing and service sectors. The net balance for manufacturing is +19%, down from +21% in February. In services, the net balance has dropped to +25%, from +29% in the previous outlook period.

This reminded me of what we had been told earlier in July.

France remained well behind the rest of the pack in June, with French companies seeing output and new orders edge back into contraction territory. The downturn in manufacturing production continued, while the trend in service sector activity slid slightly below the stagnation mark.

Oh and the elephant in the room had not yet arrived.

while already fragile sentiment is likely to be impacted further by the UK’s Brexit vote (most survey responses were received prior to the result).

As the surveys had suggested that the French economy was at best stagnating in June then we have an ominous outlook for the summer especially if we factor in the boost from hosting the European Championships.

Unemployment

There was some good news on this front in the Markit Survey.

A more positive development was an improvement in employment expectations to the strongest for five years, albeit the forecast rate of job creation remains modest overall and unlikely to make a significant dent in the persistently high unemployment rate.

If we move to the official data we are told this.

In Q1 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.2% of active population, as in Q4 2015.

The first impact is provided by the number being in double digits as we note that the number is much higher than in the UK and US. One can debate the numbers but there is also this issue.

Thelong-term unemployed rate stood at 4.3% of active population in Q1 2016. It increased by 0.1 percentage points compared to the previous quarter, as over a year.

So we see that whilst the employment situation  improved in France as economic growth rallied it struggled to make much of a dent in unemployment which begs a question of what will happen if the present slow down continues.

The French banks

These have mostly stayed under the radar as more obvious targets like Deutsche Bank or a list of Italian banks take centre stage. However I recall the opening phases of the Greek crisis where several French banks were caught blinking in the headlights as their move into Greek banking went from claimed triumph to disaster. There was also the “orderly resolution” of Dexia where the French government now owns some 44.4% of the company as it and Belgium look to restore it. Dexia itself tells us that everything is fine in spite of its ability to find trouble.

To recall, as at 31 March 2016, Dexia’s exposure to British counterparties amounted to EUR 26 billion. These assets have a sound credit quality, with 97% rated “Investment Grade”. This portfolio is mainly composed of EUR 13 billion on the local public sector and EUR 9 billion on corporates,

Ah “sound credit quality” . So we await to see how the various ructions and dislocations affect the likes of  Credit Agricole and BNP Paribus. Like so many banks their share prices have fallen with my old client Credit Agricole falling from 14 Euros to 7.55 as I type this over the past year.

Meanwhile there is the steady drip,drip drip effect on bank profitability of the -0.4% depost rate of the ECB.

Of debt and deficits

France has found itself between a rock and a hard place here. Officially it has criticised other countries for ignoring Euro area rules on fiscal deficits and the size of the national debt. However it has ignored the rules of the Stability and Growth Pact itself! As we stand the situation seems to be carrying on as before. From the French budget office.

At May 31, 2016, the general running balance at May 31, 2016 was – 65.7 billion euros against – 63.9 billion euros at the end May 2015.

The official plan is to do this and readers may note that both numbers exceed the thresholds, as we also note that so far in 2016 the deficit numbers are not yet falling as promised..

They help to continue the recovery trajectory of public accounts, with the objective to reduce the public deficit to 3.8% of GDP in 2015 and 3.3% of GDP in 2016.

Moving to the national debt we see this.

At the end of Q1 2016, the Maastricht debt amounted to €2,137.6 billion, a €40.7 billion increase in comparison to Q4 2015. It accounted for 97.5% of GDP, 1.4 points higher than the Q4 2015’s level.

On a comparable basis ( i.e not using the headline UK figure) that compares to 87.4%.

Comment

There is much to consider here as the French economy shows signs of grinding to a halt after a better phase. This does pose a problem as after recovering well from the initial impact of the credit crunch it then struggled as the Euro area crisis hit. The net effect was that the economy was only 4.1% larger in 2015 than it was in 2010. Nothing to write home about there especially if we consider how much effect has been put into this by the European Central Bank with its -0.4% Deposit Rate and 80 billion Euros a month of QE and overall lower level for the Euro. To this we can add the beneficial effect of the lower oil price.

If we move on we see that an organisation headed by a very famous Frenchwoman seems in the process of making another U-Turn. What I mean by this is that the IMF headed by Christine Lagarde seems much more in favour of fiscal policy that it did before. In which case France was right all along! At least in what it mostly did as opposed to what it said others should do. Except of course if monetary and fiscal policy is such a success then why has economic growth disappointed and why are we seeing signs of another set back?

The numbers currently are being boosted by the monetary policy of Mario Draghi of the ECB. The French government should send him a few bottles of Chianti in return for policies which allow it to be paid to borrow at a fair way up the maturity spectrum ( the 5 year yield is -0.43%) . Even the 10 year yield is a mere 0.1% which means that new borrowing for the French government is pretty much free if it wants it to be. Whoever looked into the crystal ball of the future and forecast such an utter defeat for the concept of the “bond vigilantes” and in this respect for the concept of The Stability and Growth Pact? Yet if economic growth does not return in a sustained way the victory is a pyrrhic one.

Let me finish by apologising for the behaviour of some English fans during the European Championships. Sadly as the closure today of the Eiffel Tower proves there are problems elsewhere on that front.

 

 

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21 thoughts on “Is there trouble ahead for the economy of France?

  1. Shaun, is there any easy way of measuring and comparing the relative size of two countys’ economies without incorporating currency fluctuations? I realise sterling has fallen, but does that mean France’s real economy has grown in comparison and they have overtaken us? I hpe you can see what I’m driving at!

    Thanks

    Andy

    • Hi Andy Z

      It is not an easy question to answer as using an exchange has the problem that you are using a marginal price to determine a type of average concept. As the UK Pound £ has been volatile over the past few weeks we have been in great shape ( on the night of the Brexit referendum as we surged past US $ 1.50) and now in much worse shape on the same measure. So best to wait for some more stability but even so…

      As to other measures Andrew Baldwin has replied with some suggestions below.

  2. Shaun,
    Strike action in France over changes to employment laws is only suspended for the school holidays expect more unrest and union action in September . Meanwhile Hollande remains low in the polls and unlikely to be supported for re-election!

    • Hi Chris

      I await to see how things develop. There has been dislocation and a slow down in the run up to and now post the Brexit Referendum. It may be a while before we know a lot more as of course it is nearly time for the August holiday season.

  3. Hi, Andy. Hope you don’t mind me replying to your question. There is indeed a way of calculating relative size of countries’ economies that isn’t unduly sensitive to current exchange rates. It is the purchasing power parity (PPP) method:

    https://en.wikipedia.org/wiki/Purchasing_power_parity

    which is generally favoured by economists. As you can see, by the PPP estimates, the UK is the ninth largest economy in the world and the French the 10th largest according to both the IMF and the CIA, while the World Bank puts France ahead of the UK.

    https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

    The IMF estimates are the most generally accepted of the PPP estimate and the World Bank is more concerned with developing countries than developed countries, so I would tend to accept the IMF ranking over the World Bank’s between the UK and France.

    Nominal GDP estimates adjusted for exchange rates are notorious for unfairly favouring higher wage countries over lower wage countries. To my mind, it was nothing but jingoism that led people to talk about the UK as the world’s fifth largest economy during the Brexit debate. India, Russia, Brazil and Indonesia, all smaller economies than the UK when looking at exchange-rate estimates, all have larger economies based on PPP estimates. Russia, not the UK, is the second largest European economy after Germany.

    https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

    • This is a reality Brexiters will soon be facing, although I expect they will deny it as foreign interference in the UK and GBP!

      It might also be worth mentioning the Economist’s Big Mac Index. This works on the same basis as PPP, but is interesting in that a Big Mac is the same all over the world and the ingredients/preparation are drawn locally to each franchised shop. Consequently, you can take a Big Mac and compare its price in two countries using the FX rate between them or discern what the FX rate should be by equalising the BM price in each country.

      It will also suit Brexiters well as they seem to want to send many immigrants home and leave the McJobs to the British!

      • Britain’s high position in PPP surprised me. As with all economic statistics averages hide much detail. A single income family with 8.00 GBP per hour job needs housing subsidy/benefit in the South East – how does this qualify in the top 10 PPP ?

        Nett of housing costs, I earn more here than the UK. Plus I live in a very affordable country. I like my PPP

      • I don’t see any constructive plans from either leavers or remainers. The EC is a big mess, and costs Europeans too much. European nations are sleepwalking into a financial crisis / debt timebomb.

        I love the concept of the EU, but think it needs major reform to improve Euro governance. As previously said – sweeping the EC’s faults under the carpet risks wrecking the whole project. Many Euro politicians are in denial of the need for democratic legitimacy – voters who believe the EU system works for them, not for lobbyists and smoky back room deals where companies like Monsanto spend millions getting unpopular laws made. Voters who believe the system works will vote 80%+ remain ….

        Remain lost, re-asking the same question with nout changed isn’t cricket. EEA mambership brings the same problems.

        How can all Europeans work together to hold our politicians accountable and fix our common institutions ?

    • Thank you so much Andrew (and Shaun for his comments too), I knew there was something but simply couldn’t remember what.

  4. Hi Shaun.
    Unlike the team, the fans do not represent the country, and no-one owes an apology for the few who behaved poorly.

  5. Hi Shaun, unfortunately I think your article has fallen foul of political developments. There was much nervousness amongst investors in the lead up to Brexit for the EZ, EU and the world in general as well as the UK.

    It is too early to tell what will happen next with France, the EZ or the EU following the Brexit decision. Sentiment was collapsing months prior to the vote amidst conversation about the likely impact of Brexit if it went ahead

    Just as the apologists for Brexit have already been making excuses for the UK’s impending (next year) slowdown which they argued would happen this year due to other developments so investor sentiment is neutral/negative re the EZ/EU due to Brexit.

    Personally, I know the UK will pick up speed now to year end due to other developments last year and I think France will slightly increase speed.

    The trouble with PMI and Markit surveys is that they tend to tell you what’s happening now or what has just happened rather than providing a clear indication of what to expect in the future although they do provide information to nuance your view. Unemployment numbers used to be a good guide to future developments post credit crunch but I have watched their relevance re future forecasting dwindle over the last couple years.

    I think Markit will be surprised by the direction of France from July onwards in spite of Brexit as investors have now digested the news and I believe are taking a more positive short term view especially as the Euro has weakened internationally slightly since Brexit – the UK achieved what Mario and the ECB could not!

    • Hi Noo2

      It is hard to avoid political developments right now! Who woke up this morning and thought that Theresa May would be Prime Minister on Wednesday?

      The debate between Markit and Insee has gone on for a while about some of these numbers with Markit being more bearish. On that front until Markit can prove it then my rule of taking the official numbers applies. But then we get to the Bank of France which is usually at the optimistic end of things. Oh and before this is over we are likely to see more easing to further muddy the waters.

      • “Who woke up this morning and thought that Theresa May would be Prime Minister on Wednesday?”

        Yes, that she was a vociferous remain campaigner does not inspire confidence and the ease and speed with which she changed horses calls into question her integrity and credulity.

        As you know, I was and still am anti Brexit and would never consider accepting a post anywhere which required my support for Brexit let alone actively working towards it!! Then again, I’ve got something called principles and integrity……

      • To you rawbuzzin and what of hypocrisy?

        It should clearly have been a leave campaigner who took the helm, you will never know if Theresa May really believes in this and if things don’t go the way you anticipate (likely), you and others, including me will be first in line to question her motivations and rightly so.

  6. Hi Shaun
    Will the three “Power Girls” of
    europe tell the truth about their banks.

    Angela can’t, Christine won’t but Theresa May…

    JRH

  7. It’s difficult to see how France can achieve greater growth, having regard to its very restrictive labour laws and it’s love of strikes, which always seem to see the government always capitulate. Coupled with the large proportion of the workforce employed by the State. Can you see any chance of improvement in the future?

    • Hi Foxy

      Unless something changes a lot for the better then France seems to be stuck in a relatively low growth period. I am waiting to see what the central banks do next as a lot may be on the horizon. On Thursday we see what the Bank of England has and now Prime Minister Abe has a stronger hand we can expect more from the Bank of Japan which may trigger the ECB. The catch is that if such things were a magic wand we would not be here.

      • If the workforce in France has been “stuck in a relatively low growth period”, they are doing better than British workers, who see very little change, and the case could easily be made for working class shrinkage, regardless of the state of the economy.

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