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.