It is time for us to cross the Channel or La Manche if you prefer and take a look at the economy of France. The UK media seldom get past what is happening around Calais these days although the Financial Times is keen to point out the efforts France is making to get business from the UK.
France will this week step up efforts to attract business from London in the wake of the Brexit vote by appointing a team of corporate leaders and politicians to drive the campaign.
I may well see them as you see French is certainly the secondary and sometimes the primary language in Battersea Park these days. The Ecole at South Kensington has been added to by I believe a couple of others in Battersea. Even the FT finds itself having to admit by default why so many moved the other way.
The inflexibility of the French labour code, along with high taxes, is one of the main reasons some financial groups say they will be reluctant to move to Paris.
Another issue has been the travails of the French economy. Initially it rebounded from the impact of the credit crunch but then it struggled and stagnated. Whilst it evaded the main issues of the Euro area crisis there plainly was some impact as France found economic growth hard to achieve. The latest official numbers tell us that for half of 2016 the economy pretty much stood still.
In Q3 2016, gross domestic product (GDP) in volume terms* recovered: +0.2%, after -0.1% in Q2.
If we look into the numbers whilst there was a return to growth it relied on a very large swing in inventories which of course cannot go on for ever.
In Q3, changes in inventories contributed to GDP growth by +0.6 points, after -0.8 points in Q2.
Domestic demand was only marginally higher ( it added 0.1% to GDP) which has to be a disappointment when you consider that the ECB ( European Central Bank) has an official interest-rate of -0.4% and QE. Actually there is another troubling issue where the French look rather like the UK.
All in all, foreign trade balance contributed negatively to GDP growth (-0.5 points after +0.6 points).
If we look into this more deeply we see this.
In Q3 2016, imports recovered sharply (+2.2% after -1.7%), particularly due to purchases of raw hydrocarbons and transport equipment. At the same time, exports accelerated moderately (+0.6% after +0.2%)
Overall this means that the French economy grew by 1.2% in 2015 and so far in 2016 is growing at an annual rate of 1.!%. The ECB has thrown the equivalent of a monetary kitchen sink looking at Euro area economic growth and so will be noting that this is the sort of economic growth which has caused trouble for both Italy and Portugal.
When you lack economic growth the lesson taught us by Italy and Portugal is that the national debt sings along to the Electric Light Orchestra.
higher and higher it’s a living thing
The latest numbers for France tell us this.
At the end of Q2 2016, the Maastricht debt amounted to €2,170.6 billion, a €31.7 billion increase in comparison to Q1 2016. It accounted for 98.4% of GDP, 0.9 points higher than the Q1 2016’s level.
It is edging towards 100% which these days is mostly symbolic as of course the bond buyers of the ECB are chomping away on French government bonds like Pac men and women. They have bought some 202.5 billion Euros worth and rising so far. This means that the ten-year yield is a mere 0.5% or so and the five-year is -0.28%.
In 2015 France’s fiscal deficit was 3.6% of its GDP. If we go back to my subject of yesterday it is yet another economy which contrary to the establishment line has been receiving a fiscal boost. However it has stability and growth pact rules applying in the opposite direction and so far in 2016 has trimmed borrowing a little. By the way rules needs to go into my financial lexicon for these times.
As you can see various problems emerge here. France continues to run a deficit and if economic growth fails to pick up the national debt to GDP ratio will start “slip,sliding away” . If you think about it this poses a real problem for the ECB as should it begin to “taper” its QE then presumably French bond yields would rise and it would make its fiscal deficit worse. This is one of the reasons why I think any taper is not on the immediate horizon.
Also debt full stop may well turn out to be an issue for France as marketwatch pointed out back in May.
while France’s equivalent (total) debt is around 280% of GDP, up 66% (since 2007). This tally ignores unfunded pension and health-care obligations, as well as contingent commitments to euro zone bailouts.
We get a bit of ying and yang here as yesterday’s news on the automotive sector was disappointing. From Reuters.
PARIS — French new-car registrations fell 4 percent in October to 155,202 after sales at domestic automakers Renault and PSA Group both dropped, the CCFA industry association said today.
This seemed to be concentrated in the French manufacturers.
Renault’s sales declined by 9.2 percent last month, while PSA’s registrations fell 5.8 percent. Renault’s sister company Nissan saw its volume fall 18 percent.
In better news the Markit PMI business survey has shown a pick-up for French manufacturing.
The latest survey data signalled an improvement in the French manufacturing sector, underlined by a solid expansion in production. New orders also increased for the first time this year, albeit at a more subdued pace.
Although care is needed as 51.8 is growth but not a lot of it and compares with 53.5 for the Euro area as a whole.
There is a clear divergence here with the UK and is illustrated by the official numbers below.
Year-on-year, house prices increased in Q2 2016 (+0.8%), for the second consecutive quarter. New dwellings prices grew a little more (+1.0% y-o-y) than second-hand dwellings prices (+0.7%).
This is made clearer by the overall house price index being set at 100 in 2010 and being 100.4 now!
There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal. Now is it the changes in the UK housing market that have made much of the difference where there is some economic growth but in my opinion we also count inflation as growth.
There are a lot of similarities as Jeremy Smith of Prime Economics pointed out in April 2015.
The total population size is almost the same…….For 2014, the OECD puts France at $2,525,962m, and the UK at $2,552,152m (in current prices and current PPP, or purchasing power parity)……..Or take the structure of the economy – the UK and France each has a manufacturing sector which is 10-12% of the total economy (production as a whole is 15%) while the service sector for each is 79%……And last but not least in similarities, both have gaping trade in goods deficits, which added together come to roughly the equivalent of Germany’s trade surplus!
The differences are the housing market and in particular house prices and the exchange rate system with the UK having its own and France sharing the Euro. But perhaps the biggest difference is the labour market with the UK having an unemployment rate of 4.9% and France 9.9%. From that come all sorts of issues for productivity and wages.