Today’s surveys show that any economic recovery in France remains distant

Today out focus shifts to the second largest economy in the Euro area as La Belle France takes centre stage. Let us open with the thoughts of the finance minister on the economic state of play.

PARIS (Reuters) – Recent economic indicators for France are satisfactory but too fragile to change the forecast for an 11% economic contraction this year, Bruno Le Maire said Thursday.

The Minister of the Economy, speaking to the National Assembly for the debate on the orientation of public finances for 2021, said he expected economic growth of 8% for France next year and expressed the will that the in 2022, activity returns to its levels preceding the crisis linked to the new coronavirus.

Only a politician could use the words “satisfactory” and “too fragile” in the same sentence and it is a grim one of a 11% decline in GDP ( Gross Domestic Product) for this year. This means that the expectations for France are worse than those for the Euro area as a whole.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively. ( ECB 16th July)

So around 3% worse which is interesting and I note that there is a similar pattern of predicting most but far from all of it returning in 2021. That is what you call making a forecast that is like an each-way bet where if you do recover no-one will care and if you do worse than that you highlight you did not expect a full recovery. The truth is that none of us know how 2020 will finish let alone what will happen next year. Maybe the quote below suffers from translation from French but “expressed the will?”

expressed the will that the in 2022, activity returns to its levels preceding the crisis

What does that mean? So let us move on knowing 2020 will be bad with a likely double-digit fall in economic output.

Right Here, Right Now

This morning has brought the latest in the long-running official survey on the economy.

In July 2020, the business climate has continued its recovery started in May. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 7 points. At 85, the business climate is however still significantly below its long-term average (100), and a fortiori below its relatively high pre-lockdown level (105).

The ending of the lockdown has seen a welcome rally of 7 points but sadly only to 85% of the long-term average. If we look back though I note it was recording a relatively high 105 which makes me mull this.

In Q1 2020, real gross domestic product (GDP)* fell sharply: -5.3% after -0.1% in Q4 2019, thus a revision of +0.5% compared with the first estimate published in April.

I think the relevant number is the contraction in the last quarter of 2019 and how does that relate to a relatively high reading. As the fall is only 0.1% we could argue the economy was flat lining but we still have a measure recording growth when there wasn’t any.

Going back to the survey we see a similar pattern but weaker number for employment.

In July 2020, the employment climate has continued to recover sharply from the April low. At 77, it has gained 10 points compared to June, but it still remains far below its pre-lockdown level.

Manufacturing

The position here is particularly bad.

According to the business managers surveyed in July 2020, the business climate in industry has continued to improve. The composite indicator has gained 4 points compared to June, after losing 30 points in April due to the health crisis. However, at 82, it remains far below its long term average (100).

Looking ahead the order book does not look exactly auspicious either.

In July 2020, slightly fewer industrialists than in June have declared their order books to be below normal. The balances of opinion on total and foreign order books have very slightly recovered. Both stand at very low levels although slightly higher than in 2009.

If we look back this measure had a recent peak around 112 as 2018 began. This represented quite a rally compared to the dips below 90 seen at times in 2012 and 13. But after that peak it began slip-sliding away to around 100 and now well you can see above.

Saving

Whilst debt hits the headlines the breakdown of the GDP data shows that it is not the only thing going on.

At the same time, household consumption fell (-5.6% after +0.3%), resulting in a sharp rise of the saving rate to 19.6% after 15.1% in Q4 2019.

The pandemic has seen higher levels of saving which has two drivers I think. Firstly many simply could not spend their money as so many outlets closed. Next those who can look like they have been indulging in some precautionary saving which is something of a disaster for supporters of negative interest-rates.

National Debt

Having just looked at ying here is part of the yang.

In Q1 2020 the public deficit increased by 1.1 points: 4.8% of GDP after 3.7% in Q4 2019.

So we see that pandemic France was borrowing more and regular readers will have noted this from past articles. For the year as a whole France had its nose pressed against the Growth and Stability Pact threshold of 3% of GDP. I know some of you measure an economy by tax receipts so they were 1.275 trillion in 2019.

Moving to the national debt we see this.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Looking ahead this is the view of the Bank of France.

As a result of the wider deficit and the fall in GDP, government debt should rise substantially to 119% of GDP in 2020, from 98.1% in 2019, and should scarcely decline over the rest of the projection horizon. The average debt-to-GDP ratio for the euro area should also increase in parallel, but to a more limited extent (to 101% of GDP in 2022, easing to 100% by end-2022).

Comment

There are some familiar patterns of a sharp drop in economic output followed by plenty of rhetoric about a sharp recovery next year. However the surveys we have looked at show a very partial recovery so far so that the “V-shaped” hopium users find themselves singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

Switching to the mounting debt burden it is a clear issue in terms of capital and if you like the weight of the debt. Also estimates of economies at around 120% of GDP went spectacularly wrong in the Euro area crisis. But in terms of debt costs then with a ten-year yield of -0.19% France is often being paid to issue debt. Although care is needed because the ECB does not buy ultra long bonds ( 30 years is its limit) meaning that France has a fifty-year bond yield of 0,58%. We should not forget that even the latter is very cheap, especially in these circumstances.

Also there is this from the head of the ECB Christine Lagarde.

In my interview with @IgnatiusPost

, I explained that price stability and climate change are closely related. Consequently, we must take climate-related risks into account in our central banking activities.

 

 

 

The ECB hints at buying equities and replacing bank intermediation

A feature of this virus pandemic is the way that it seems to have infected central bankers with the impact of them becoming power mad as well as acting if they are on speed. Also they often seen lost in a land of confusion as this from yesterday from the Governor of the Bank of France highlights.

Naturally, there is a huge amount of uncertainty over how the economic environment will evolve, but this is probably less true for inflation.

Okay so the picture for inflation is clearer, how so?

 In the short term, the public health crisis is disinflationary, as exemplified by the drop in oil prices. Inflation is currently very low, at 0.3% in the euro area and 0.4% in France in April; granted, it is particularly tricky to measure prices in the wake of the lockdown, due to the low volume of data reporting and transactions, and the shift in consumer habits, temporary or otherwise.

This is not the best of starts as we see in fact that one price has fallen ( oil) but many others are much less clear due to the inability to measure them.Of course having applied so much monetary easing Francois Villeroy is desperate to justify it.

The medium-term consequences are more open to debate, due notably to uncertainties over production costs, linked for example to health and environmental standards and the potential onshoring of certain production lines; the differences between sectors could be significant, leading to variations in relative prices rather than a general upward path.

As you can see he moves from not being able to measure it to being very unsure although he later points out it is expected to be 1% next year which in his mind justifies his actions. There is the usual psychobabble about price stability being an inflation rate of 2% per annum which if course it isn’t.  #

Policy

It is probably best if you live in a glass house not to throw stones but nobody seems to have told Francois that.

Our choice at the ECB is more pragmatic: since March, we, like the Fed and the Bank of England, have greatly expanded and strengthened our armoury of instruments and in so doing refuted all those – and remember there were a lot of them only a few months ago – who feared that the central banks were “running out of ammunition”.

I will return to that later but let us move onto what Francois regards as longer-term policies.

First, in September 2019, we amended our use of negative rates with a tiering system to mitigate their adverse impacts on bank intermediation. I see no reason to change these rates now.

Actually it has not taken long for Francois to contradict himself on the ammunition point as “see no reason” means he feels he cannot go further into negative interest-rates for the general population. You may also note that he starts with “My Precious! My Precious!” which is revealing. Oh and he has cut the TLTRO interest-rate for banks to -1% more recently.

Plus.

Meanwhile, asset purchases, in operation since mid-2014, reached a total of EUR 2,800 billion in April 2020 and will continue at a monthly average pace of more than EUR 30 billion.

Make of this what you will.

We can also add forward guidance to this arsenal,….. This forward guidance provides considerable leeway to adapt to economic changes thanks to its self-stabilising endogenous component.

New Policy

Suddenly he did cut interest-rates and we are back to “My Precious! My Precious!”

The supply of liquidity to banks has been reinforced in terms of quantity and, above all, through an incentivising price structure. Interest rates on TLTROIII operations were cut dramatically on 12 March and again on 30 April and are now, at -1%

There is also this.

Above all, we have created the EUR 750 billion Pandemic Emergency Purchase Programme (PEPP)…….First, flexibility in terms of time. We are not bound by a monthly allocation…….Second, flexibility in terms of volume. Unlike the PSPP, we are not committed to a fixed amount – today, the PEPP can go “up to EUR 750 million”, and we stated on 30 April that we were prepared to go further if need be.

If we look at the weekly updates which have settled at around 30 billion Euros per week the original 750 billion will run out as September moves into October if that pace is maintained. So it looks likely that there will be more although as the summer progresses things will of course change quite a bit.

Then Francois displays even more of what we might call intellectual flexibility. You see he is not targeting spreads or “yield curve control” or a “spread control” but he is….

While there is a risk that the effects of the crisis may in some cases be asymmetric, we will not allow adverse market dynamics to lead to unwarranted interest rate hikes in some countries.

So he is trying to have his cake and eat it here.

Innovation

This word is a bit of a poisoned chalice as those have followed the Irish banking crisis will know. But let me switch to this subject and open with a big deal for the ECB especially since the sleeping giant known as the German Constitutional Court has shown signs of opening one eye, maybe.

And this brings me to my third point, flexibility in terms of allocation between countries.

He means Italy of course.

Next up is one of the sillier ideas around.

Allow me to say a final word on another development under discussion: the possibility of “going direct” to finance businesses without going through the bank channel. The truth is that we do this already, and have done since 2016, by being among the first central banks to buy corporate bonds.

He is probably keen because of this.

The NEU-CP market in Paris is by far the most active in the euro area, with outstandings of EUR 72 billion in mid-May, and the Banque de France’s most recent involvement since the end of March has been very effective and widely acknowledged by industry professionals.

Ah even better he has been able to give himself a slap on the back as well.

He is eyeing even more.

With its new Main Street Lending Program, the Fed recently went a step further by giving itself the possibility to fund the purchases of bank loans to businesses, via a special-purpose vehicle created with a US Treasury Department guarantee

If banks are bad, why are we subsidising them so much? Also why would central banks full of banks be any better?

After sillier let us have silliest.

ECB’s Villeroy: Would Not Put At Forefront Likelihood Of Buying Up Equities ( @LiveSquawk )

Comment

There is a familiar feel to this as we observe central bankers twisting and turning to justify where they find themselves. Let me start with something which in their own terms has been a basic failure.

This sluggishness in prices comes after a decade of persistently below-target inflation, which has averaged 1.3%.

This provides a range of contexts as of course the inflation picture would look very different if they made any real effort to measure  the one third or so of expenditure that goes on housing costs. In other areas this would be a scandal as imagine how ignoring a third of Covid-19 cases would be received? Also you might think that such failure after negative interest-rates and 2.8 billion Euros of QE might lead to a deeper rethink. This policy effort has in fact ended up really being about what was denied in this speech which is reducing bond yields so governments can borrow more cheaply. The hints in it have helped the ten-year yield in Italy fall to 1.55% as I type this.

Oh the subject of the ECB buying equities I am reminded that I suggested on the 2nd of March it would be next to make that leap of faith. I still think it is in the running however the German Constitutional Court may have slowed it up. The hint has helped the Euro Stoxx 50 go above 3000 today as equity markets continue to be pumped up on liquidity and promises. But more deeply we see that if we look at Japan what has been achieved by the equity buying? The rich have got richer but the economy has not seen any boost and in fact pre this crisis was in fact doing worse. So he is singing along with Bonnie Tyler.

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

 

What can we expect next from the economy of France?

During the Euro area slow down France has mostly been able to avoid the limelight. This is because it has at least managed some economic growth at a time when Germany not always has. It may not be stellar growth but at least there has been some.

In Q2 2019, GDP in volume terms grew at the same pace as in the previous quarter: +0.3% (revised by +0.1% from the first estimate).

However  there are questions going forwards which plugs into the general Euro area problem which got a further nudge on Monday.

The IHS Markit Eurozone Composite PMI® fell to
50.4 in September according to the ‘flash’ estimate,
down from 51.9 in August to signal the weakest
expansion of output across manufacturing and
services since June 2013………The survey data indicate that GDP looks set to rise by just 0.1% in the third quarter, with momentum weakening as the quarter closed.

As you can see growth is fading and may now have stopped if the PMI is any guide and this was reflected in the words of the Governor of the Bank of France in Paris yesterday.

For the past ten years, there is little doubt that ECB monetary policy under Mario Draghi’s Presidency has made a decisive contribution not only to safeguarding the euro in 2012, but also to the significant recovery of the euro area since 2013. Over this period, more than 10 million jobs have been created. Our unconventional measures are estimated to add almost 2 percentage points of growth and of inflation between 2016 and 2020.

It is revealing that no mention is made of growth right now as he concentrates on what he considers to be past glories. He has rounded the numbers up too as they are 1.5% and 1.9% respectively. Let me give him credit for one thing though which is this although I would like him to say this to the wider public as well.

Since I am talking to an audience of researchers I should of course emphasise that such numbers are subject to uncertainty.

Also raising inflation in the current environment of weak wage growth is likely to make people worse and not better off.

France

The situation here was better than the Euro area average but still slowed.

At 51.3 in September, the IHS Markit Flash France
Composite Output Index fell from 52.9 in August,
and pointed to the softest expansion in private sector
activity for four months.

Actually manufacturing is doing okay in grim times with readings of 49.7 and 50.3 suggesting flatlining. The real fear here was that the larger services sector is now being sucked lower by it.

However, with services firms registering their
slowest rise in activity since May, fears of negative
spill over effects from the manufacturing sector are
coming to fruition. Any intensification of such effects
would likely dampen economic growth going
forward.

This leaves me mulling the record of Markit in France as several years ago it was criticised for being too pessimistic by the French government and more recently seems to have swung the other way.

What about fiscal policy?

This did get a mention in the speech by the Governor of the Bank of France yesterday.

Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth.

The problem with that argument is that even the French run IMF could not avoid pointing out this in July.

France’s public debt has been consistently rising over the last four decades, increasing by 80 percent of GDP since the 1980s to reach close to 100 percent of GDP at end-2018. This reflects the inability of successive governments to take full advantage of good times to reverse the spending increases undertaken during downturns.

Actually some of the IMF suggestions look rather chilling and perhaps in Orwellian language.

rationalizing spending on medical products and hospital services; improving the allocation of resources in education

Also and somewhat typically the IMF has missed one change in the situation which is that at present France is being paid to borrow. It’s ten-year yield went negative at the beginning of July and has mostly been there since. As I type this it is -0.32%. It still has to pay a little for longer terms ( the thirty-year is 0.48%) but as you can see not much.

So the situation is that France does have quite a lot of relatively expensive debt from the past but could borrow now very cheaply if it chose to do so.

Banks

Whilst he s referring to macroprudential policy it is hard not to have a wry smile at this from the Governor of the Bank of France.

 To start with, as of today, our toolkit is very much bank-centric.

Especially when he add this.

We are making some progress to extend macroprudential policy beyond the banking sector.

Returning to the banks they are just like elsewhere.

PARIS (Reuters) – Societe Generale (SOGN.PA) plans to cut 530 jobs in France by 2023, CGT union said in a statement.

Of course BNP Paribas has been taking some brokerage business and employees from Deutsche Bank although it has not be a complete success according to financemagnate.com.

Deutsche’s clients will receive letters explaining how the transfer will work. However, some of them have already moved to competitors such as Barclays, which has won roughly $20 billion in prime brokerage balances.

In a way the French banks have used Deutsche Bank as a shield. But many of the same questions are in existence here. How are they going to make sustained profits in a world of not much economic growth and negative interest-rates?

Unemployment

This is the real achilles heel of the French economy. From Insee

The ILO unemployment rate decreased by 0.2 points on average in Q2 2019, after a 0.1 points fall in the first quarter. It stood at 8.5% of the labour force in France (excluding Mayotte), 0.6 points below its Q2 2018 level and its lowest level since early 2009.

Whilst the falls are welcome it is the level of unemployment and the fact it is only now approaching the pre credit crunch levels which are the issue as well as this.

Over the quarter, the employment rate among the youth diminished (−0.3 points),

Whilst the unemployment rate for youth fell by 0.6% to 18.6% it is still high and the falling employment rate is not the best portent for the future.

Comment

So far the economy of France has managed to bumble on and unlike the UK and Germany avoided any quarterly contractions in economic output. If you look at this morning’s official survey then apparently the only way is up baby.

In September 2019, households’ confidence in the economic situation has increased for the ninth consecutive month. At 104, the synthetic index remains above its long-term average (100), reaching its highest level since January 2018.

Perhaps the fall in unemployment has helped and a small rise in real wages. The latter are hard to interpret as a change at the opening of the year distorted the numbers.

firms might pay a special bonus for purchasing power (PEPA) in the first quarter of 2019, to employees earning less than 3 times the minimal wage.

According to the official survey published yesterday businesses are becoming more optimistic too.

In September 2019, the business climate has gained one point, compared to August. The composite indicator, compiled from the answers of business managers in the main sectors, stands at 106, above its long-term mean (100)

So there you have it everything except for the official surveys points downwards. In their defence the official surveys have been around for a long time. So let me leave you with some trolling by the Bank of France monthly review.

French economic growth has settled into a fairly stable pace since mid-2018 of between 1.2% and 1.4% year-on-year . France has thus demonstrated greater resilience than other euro area economies, particularly Germany, where year-on-year growth only amounted to 0.4% in mid-2019. This growth rate should continue over the coming quarters: based on Banque de France business surveys published on 9 September, we expect quarter-on-quarter GDP growth in the third quarter of 2019 of 0.3%.

Rethinking The Dollar

I did an interview for this website. Apologies if you have any issues with the sound as the technology failed us a little and we had to switch from my laptop to my tablet.

 

 

 

 

Some much needed better economic news for France

Today has brought some good news for the economy of France and let us start with a benefit for the future. From Reuters.

Airbus signed a deal on Monday to sell 300 aircraft to China Aviation Supplies Holding Company, including 290 A320 planes and 10 A350, the French presidency said in a statement.

So we learn that someone can benefit from a trade war as we also see Boeing’s current problem with the 737 max 8 no doubt also at play here. Airbus is a European consortium but is a major factor in the French economy and below is its description of its operations in France.

Overall, Airbus exports more than €26 billion of aeronautical and space products from France each year, while placing some €12.5 billion of orders with more than 10,000 French industrial partners annually.

Business surveys

The official measure released earlier told us this.

In March 2019, the business climate is slightly more favorable than in February. The composite indicator, compiled from the answers of business managers in the main sectors, has gained one point: it stands at 104, above its long-term mean (100).

If we look at the recent pattern we see a fall from 105 in November to 102 in December where it remained in January before rising to 103 in February and now 104 in March. So according to it growth is picking up. It has a long track record but is far from perfect as for example the recent peak was 112 in December 2017 but we then saw GDP growth of only 0.2% in the first quarter of 2018 as it recorded 110.

Continuing with its message today we are also told this about employment.

In March 2019, the employment climate has improved again a little, after a more marked increase in February: the associated composite indicator has gained one point and stands at 108, well above its long-term average.

This is being driven by the service sector.

Also things should be improving as we look ahead.

The turning point indicator for the French economy as a whole remains in the area indicating a favourable short-term economic outlook.

Although the reading has fallen from 0.7 in January to 0.5 in March.

Economic Growth

We have been updated on this too with a nudge higher.It did not come with the fourth quarter number for Gross Domestic Product ( GDP) growth which was still 0.3% but the year to it was revised up to 1% from 0.9% and the average for 2018 is now 1.6% rather than 1.5%.

National Debt

The economic growth has helped with the relative number for the national debt.

At the end of 2018, the Maastricht debt accounted for €2,315.3 bn, a €56.6 bn year-on-year growth after a €70.2 bn increase in 2017. Maastricht debt is the gross consolidated debt of the general government, measured at nominal value. It reached 98.4% of GDP at the end of 2018 as in 2017.

As you can see the debt has risen but the economic growth has kept the ratio the same. At the moment investors are sanguine about such debt levels with the ten-year yield a mere 0.37% and it has been falling since mid October last year when it was just above 0.9%. Partly that is to do with the ECB buying and now holding onto some 422 billion Euros of it plus mounting speculation it may find itself buying again.

Those who followed the way the European Commission dealt with Italy may have a wry smile at this.

In 2018, public deficit reached −€59.6 bn, accounting for −2.5% of GDP after −2,8% of GDP in 2017

With economic growth slowing and President Macron offering a fiscal bone or two to the Gilet Jaunes then 2019 looks like it will see a rise. As to the overall situation then France has a public sector which fits the description, hey big spender.

As a share of GDP, revenues decreased from 53.6% to 53.5%. Expenditure went down from 56.4% to 56.0%.

For comparison the UK national debt under the same criteria is 84% of GDP although our bond yield is higher with benchmark being 1%.

Prospects

The Bank of France released its latest forecasts earlier this month and if we stay in the fiscal space makes a similar point to mine.

After a period of quasi-stability in 2018 at 2.6% of GDP, the government deficit is expected to climb temporarily above 3% of GDP in 2019, given the one-off effect related to the transformation of the Tax Credit for Competitiveness and Employment (CICE).

So the national debt will be under pressure this year and depending on economic growth the ratio could rise to above 100%. As to economic growth here is the detail.

French GDP should grow by around 1.4-1.5% per year between 2019 and 2021. This growth rate, which has been slightly revised since our December 2018 projections, should lead to a gradual fall in unemployment to 8% in 2021.

So the omission of the word up means the revision was downwards and if they are right then we also get a perspective on the QE era as GDP growth will have gone 2.3%,1.6% and then 1.4/1.5%. So looked at like that it was associated with a rise in GDP of 1%. Also we see the Bank of France settling on what is something of a central banking standard of 1.5% per annum being the “speed limit” for economic growth.

Right now they think this.

Based on the Banque de France’s business survey published on 11 March, we estimate GDP growth of 0.3% for the first quarter of 2019.

Which apparently allows them to do a little trolling of Germany.

The deceleration in world demand is expected to weigh on activity, even though France is slightly less exposed than some of its larger euro area partners, until mid-2019.

It only has one larger Euro area partner.

Also we get a perspective in that after a relatively good growth phase should the projections have an aim that is true unemployment will be double what it is in the UK already.

Added to this we have central banks who claim to have a green agenda but somehow also believe that growth can keep coming and is to some extent automatic.

Growth should then be sustained by an international environment that is becoming generally favourable once again and export market shares that are expected to stabilise.

Oh and these days central banks are what Arthur Daley of Minder would call a nice little earner.

Like each year, the bulk of the Banque de France’s profits were paid to the government and hence to the national community in the form of income tax and dividends, with EUR 5 billion due for 2017.

Comment

There is a fair bit to consider here. Firstly we have the issue of the private-sector or Markit PMI survey being not far off the polar opposite of the official one.

At the end of the first quarter, the French private
sector was unable to continue the recovery seen in
February, as both the manufacturing and service
sectors registered contractions in business activity.

If they surveyed a similar group that is quite a triumph! The French economy can “Go Your Own Way” as for example we saw it grow at a quarterly rate of 0.2% in the first half of 2018 and then 0.3% in the second. Only a minor difference but the opposite pattern to elsewhere.

Looking at the monetary data it does seem to be doing better than the overall Euro area. There was a sharp fall in M1 growth  between November and December which poses a worry for now but then a recovery of much of it to 9.2% in January. So if this is sustained France looks like it might outperform the Euro area as 2018 progresses as it overall saw a fall in money supply growth. Or if the numbers turn out to work literally then a dip followed by a pick-up.