The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.


There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.


With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.


I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

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.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016

Will rising bond yields mean ECB QE is To Infinity! And Beyond!?

Yesterday the ECB ( European Central Bank ) President Mario Draghi spoke at the European Parliament and in his speech were some curious and intriguing phrases.

Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration.

I say that bit was curious because it contrasted with the other rhetoric in the speech as we were told how well things are going.

Over the last two years GDP per capita has increased by 3% in the euro area, which compares well with other major advanced economies. Economic sentiment is at its highest level in five years. Unemployment has fallen to 9.6%, its lowest level since May 2009. And the ratio of public debt to GDP is declining for the second consecutive year.

The talk of what I would call “More,More,More” is also a contrast to the December policy decision which went down the road of less or more specifically slower.

We will continue to purchase assets at a monthly pace of €80 billion until March. Starting from April, our net asset purchases will run at a monthly pace of €60 billion, and we will reinvest the securities purchased earlier under our programme, as they mature. This will add to our monthly net purchases.

There was another swerve from Mario Draghi who had written to a couple of MEPs telling them that a country leaving the Euro would have to settle their Target 2 balances ( I analysed this on the  23rd of January ) whereas now we were told this.

L’euro e’ irrevocabile, the euro is irrevocable

Of course Italian is his natural language bur perhaps also there was a message to his home country which has seen the rise of political parties who are against Euro membership.

Such words do have impacts on bond markets and yields but I was particularly interested in this bit. From @macrocredit.


A rather curious observation from someone who is effectively doing just that and of course for an establishment which trumpeted the convergence of bond yield spreads back before the Euro area crisis. Just to be clear which is meant here is the gap between the bond yield of Germany and other nations such as Spain or Italy. These days Mario Draghi seems to be displaying all the consistency of Arsene Wenger.

Oh and rather like the Bank of England he seems to be preparing himself for a rise in inflation.

As I have argued before, our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation.

Spanish energy consumers may not be so sanguine!

Growing divergence in bond yields

The reality has been that recently we have seen a growing divergence in Euro area bond yields. This has happened in spite of the fact that the ECB QE ( Quantitative Easing) bond buying program has continued. As of the latest update it has purchased some 1.34 trillion Euros of sovereign bonds as well as of course other types of bonds. Perhaps markets are already adjusting to the reduction in the rate of purchases planned to begin on April 1st.


Ch-ch-changes here are right at the core of the Euro project which is the Franco-German axis. If we look back to last autumn we see a ten-year yield which fell below 0.1% and now we see one of 1.12%. This has left it some 0.76% higher than its German equivalent.

Care is needed as these are still low levels but politicians get used to an annual windfall from ,lower bond yields and so any rise will be unwelcome. It is still true that up to the five-year maturity France can borrow at negative bond yields but it is also true that a chill wind of change seems to be blowing at the moment. The next funding auction will be much more painful than its predecessor and the number below suggests we may not have to wait too long for it.

The government borrowing requirement for 2017 is therefore forecast to reach €185.4bn.


Here in Mario’s home country the situation is more material as the ten-year yield has risen to 2.36% or 2% over that of Germany. This will be expensive for politicians in the same manner as for France except of course the yield is more expensive and as the Italian Treasury confirms below the larger national debt poses its own demands.

The redemptions over the coming year are just under 216 billion euros (excluding BOTs), or some 30 billion euros more than in 2016, including approximately 3.3 billion euros in relation to the international programme. At the same time, the redemptions of currently outstanding BOTs amount to just over 107 billion euros, which is below the comparable amount in 2016 (115 billion euros) as a result of the policy initiated some years ago to reduce the borrowing in this segment.

The Italian Treasury has also noted the trends we are discussing today.

As a result of these developments, the yield differentials between Italian government securities and similar securities from other core European countries (in particular, Germany) started to increase in September 2016……. the final two months of 2016 have been marked by a significant increase in interest rates in the bond market in the United States,

Although we are also told this

In Europe, the picture is very different.

Anyway those who have followed the many debacles in this particular area which have mostly involved Mario Draghi’s past employer Goldman Sachs will note this next bit with concern.

Again in 2017, the transactions in derivatives instruments will support active portfolio management, and they will be aimed at improving the portfolio performance in the current market environment.

Should problems emerge then let me place a marker down which is that the average maturity of 6.76 years is not the longest.


Here the numbers are more severe as Portugal has a ten-year yield of 4.24% and of course it has a similar national debt to economic output ratio to Italy so it is an outlier on two fronts. It need to raise this in 2017.

The Republic has a gross issuance target of EUR 14 billion to EUR 16 billion through both auctions and syndications.

To be fair it started last month but do you see the catch?

The size was set at EUR 3 billion and the new OT 10-year benchmark was finally priced at 16:15 CET with a coupon of 4.125% and a re-offer yield of 4.227%.

That is expensive in these times of a bond market super boom. Portugal has now paid off some 44% of its borrowings from the IMF but it is coming with an increasingly expensive kicker. Maybe that is why the European establishment wanted the IMF involved in its next review of Portugal’s circumstances.

Also at just over five years the average maturity is relatively short which would mean any return of the bond vigilantes would soon have Portugal looking for outside help again.

As of December 31, 2016 the Portuguese State direct debt amounted to EUR 236,283 million, decreasing 0.5% vis-à-vis the end of the previous month ( 133.4% of GDP).


Bond markets will of course ebb and flow but recently we have seen an overall trend and this does pose questions for several countries in the Euro area in particular. The clear examples are Italy and Portugal but there are also concerns elsewhere such as in France. These forces take time but a brake will be applied to national budgets as debt costs rise after several years when politicians will have been quietly cheering ECB policies which have driven falls. Of course higher inflation will raise debt costs for nations such as Italy which have index-linked stocks as well.

If we step back we see how difficult it will be for the ECB to end its QE sovereign bond buying program and even harder to ever reverse the stock or portfolio of bonds it has bought so far. This returns me to the issues I raised on January 19th.

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise?

Meanwhile with the ECB being under fire for currency manipulation ( in favour of Germany in particular) it is not clear to me that this from Benoit Coeure will help.

The ECB has no specific exchange rate target, but the single currency has adjusted as a consequence. Since its last peak in 2011, the euro has depreciated by almost 30% against the dollar. The euro is now at a level that is appropriate for the economic situation in Europe.

France continues to see its economy struggle

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.

Relative Stagnation

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.

National Debt

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.

Latest News

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.

House Prices

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.

La Belle France continues to find sustained economic growth elusive

It is past time for us to hop across the channel or in this context La Manche and take a look at the ongoing economic problems of France. These have no doubt not been helped by the effect of the recent terrorist outrages on tourism but today has given us a reminder of other issues with the French economy. So let us get straight to it.

Production and Manufacturing

This morning’s data release shows that it was not a good June for either overall production or manufacturing in France. From Insee.

In June 2016, output decreased in the manufacturing industry (-1.2% after +0.1% in May). It declined again in the whole industry (-0.8% after -0.5%).

Imagine if that had been the pre-Brexit position in the UK! The Financial Times would cover nothing else. Perhaps the award of a Legion d’Honneur to its editor Lionel Barber may mean that it may be in no rush to point out that the situation in June in France was considerably worse than the UK.

If we look for more perspective we see that the problems are more than just for a single month.

Over the second quarter of 2016, output decreased slightly in the manufacturing industry (-0.2% q-o-q). It was virtually stable in the overall industry (-0.1% q-o-q).

So in essence these readings spent the second quarter on a road to nowhere. That picture does not change much if we switch to an annual comparison.

Manufacturing output of the second quarter of 2016 grew slightly compared to the same quarter of 2015 (+0.3%, y-o-y). Overall industrial output was also up (+0.4%).

The release is rather reticent or perhaps forgetful on the issue of a monthly comparison with 2015 so let me help out. In June 2015 adjusted production was 101.7 and this year was 100.4 whereas manufacturing had dropped from 102.7 to 101.2.

Factors at play

Like the UK the transport sector in France has been having a good run.

Over a year, manufacturing output soared in the manufacture of transport equipment (+7.6%) and rose more moderately in “other manufacturing”(+0.5%).

The whole transport manufacturing sector seems to have been doing well as I note this from the Financial Times earlier.

BMW sales hit fresh records in July

However the boomlet does seem to be fading so needs watching. On the other side of the coin has been what is happening in the energy industry in France.

Output collapsed in the manufacture of coke and refined petroleum products (-12.4% after -21.0%)
Output plunged in the manufacture of coke and refined petroleum products, because of the shutdown of a refinery and blockades of several others in the beginning of June.

So there should be something of a bounce back there once things return to normal.

What about consumption of goods?

In June 2016, household consumption expenditure on goods decreased: -0.8% in volume*, as in May.

Now this gets a little awkward as we note that a factor in this is something which is overall a benefit for France which is lower expenditure on energy.

In June, consumption of energy tumbled significantly (-6.3% after -0.8%); it is its highest drop since June 2013.

GDP growth

The second quarter of 2016 turned out to be quite a disappointment.

In Q2 2016, GDP in volume terms* was stable : 0.0% after +0,7% in Q1.

I will look at the way this must have disappointed the ECB (European Central Bank) in a moment but there was quite a sharp fall in domestic demand seen.

All in all, final domestic demand (excluding inventory changes) was flat: its contribution to GDP growth was flat (after +1.0 points in Q1)

This was mostly consumption falling but there was also a decline in investment. Net exports rose in case you are wondering why the numbers do not add up but even there we saw something to mull.

Imports significantly stepped back (-1.3% after +0.5%), while exports still modestly declined (-0.3% as in the previous quarter).

So yes trade was a positive influence but only because imports fell faster than exports.

Looking Ahead

We are not too early for the Bank of France indicator which in its usual over optimistic fashion predicted GDP growth of 0.3% and the 0.2% for the second quarter of this year. From Reuters.

France’s economy will expand 0.3 percent in the third quarter, returning to growth after stalling in the previous three-month period, the said on Monday in its first estimate for the period.

The central bank gave its estimate in its monthly business climate survey, in which it said industrial sector confidence picked up slightly in July, increasing by one point on the previous month to 98. However confidence within the services sector dipped by a point to 96.

There is food for thought in the numbers which are long-running series where the average is 100. Earlier this month the PMI survey for the Euro area pointed out this.

whereas France continued to hover around the stagnation mark……However, France continued to stagnate, acting as a significant drag on the region.

If we look into the detail of the reports specifically on France we see this.

The service sector returned to growth at the start of the third quarter, compensating for ongoing manufacturing weakness and leaving overall private sector activity broadly flat on the month.


Mario Draghi and his colleagues must be wondering what to do next as France joins Italy in the economic slow lane with Germany and Spain in the fast line and of course Ireland which according to its statisticians overtook the Starship Enterprise in 2015. That is a problem of one size fits all monetary policy.

But France has benefited from a lower exchange rate with the trade-weighted Euro at 94.6 as opposed to the 104.5 of March 2014. Also the official interest-rate is set at -0.4% ( below the lower bound for the UK claimed by Bank of England Governor Carney) and as of the beginning of this month had purchased some 179.2 billion of French government bonds. This means that at the 2 and 5 year maturities France is paid to borrow and even at the benchmark 10 year it currently pays a mere 0.12%. As to whether the low level of bond yields boosts the economy is a moot point but it certainly helps the fiscal position of the French government.

With growth low more eyes will turn to this number especially as it approaches 100%.

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.


This has been a long running saga where the French economy recovered well from the initial credit crunch impact in 2010 and 11. But the follow-up blow of the Euro area crisis has seen its economy stagnate and now even with the ECB monetary accelerator pressed to and sometimes beyond the metal there seems to be more problems. Sustained economic growth seems to be singing along with Bonnie Tyler.

I was lost in France

Bank of England

Yesterday it failed to purchase as many UK Gilts as it wanted to buy. This was a consequence of trying to buy ultra long-dated UK Gilts which is something I have critiqued many times as well as before the event yesterday. I suggested a solution on Twitter.

Dear Bank of England Simply buy some extra medium-dated Gilts today! Yours Shaun

Instead the solution was well not a solution.

The Bank will incorporate the Stg 52mn shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme.

Talk about making yourself look inflexible and leaden footed. The markets will take them as well as sadly us as taxpayers for fools now.

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
In the building, ICA * stood at 97 in June, as

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.


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%.


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.



Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.


The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.


Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake



There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.




Goodness me, could this be industrial disease ?’

This morning has seen some developments in a theme which has been building up over the past year or so. It is the issue of how production and particularly manufacturing is struggling in quite a few parts of the first world. Back on the 2nd of December last year I put it like this.

Some of this is no doubt a shift to countries with cheaper labour forces but there seems to be a bit of a tectonic plate shift as well. Or as my Dire Straits musical reference of October 7th put it.

He wrote me a prescription he said ‘you are depressed
But I’m glad you came to see me to get this off your chest
Come back and see me later – next patient please
Send in another victim of Industrial Disease

I pointed out back then that this may be the beginnings of something of a post industrial society as economies move towards the service sector. In the UK this  “rebalancing” has been particularly pronounced in the credit crunch era albeit that it has moved in exactly the opposite direction to that promised by the former Bank of England Governor Baron King of Lothbury.

Production output fell between 2011 and 2013 to below levels seen at the height of the downturn in 2009……..Although there has generally been growth across all major components of GDP since the start of 2013, the services industries remain the largest and steadiest contributor to economic growth.

If we take the first quarter of 2008 as our benchmark then services are at 112.6 whilst production is at 90 and manufacturing at 93.2. The numbers speak for themselves and there is a particular irony in production actually falling as Baron King was trumpeting exactly the reverse as a result of the fall in the UK Pound £ ( circa 25% in around 2008) he was so keen on. As we assimilate this then we are left with the thought that by now services must be 4/5 ths of our economy as the 78.6% official estimate is from 2012. Oh and speaking of assimilation is the service sector like this?

We… are Borg. You will be assimilated. Resistance is futile.

For the UK the latest official data for manufacturing is for February and it told us this in annual terms.

The largest contribution to the fall came from manufacturing, which decreased by 1.8%. This was the largest fall since July 2013, when it fell by an equal amount.

The mood music or business surveys are sadly hammering out the same beat as we see below.

The UK Manufacturing PMI fell below its critical 50.0 mark for the first time in over three years in April…….On this evidence manufacturing production is now falling at a quarterly pace of around 1%.

This Morning


This was a particularly interesting addition to the list as the official data was as follows.

In March 2016,production in industry was down by 1.3% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In February 2016, the corrected figure shows a decreased of 0.7% (primary –0.5%) from January 2016.

If we look to the underlying index we see that rather than the expected growth it at 109 in March is only just above the 108.8 of March 2015 showing that on current trends there is a danger of year on year falls. This is significant because as you can see from the 9% growth since 2010 until now German manufacturing had been rumbling forwards.

As to the business surveys well they are downbeat too.

the German manufacturing sector remains stuck in a low gear at the start of the second quarter. (Markit)

La Belle France

The statistics office was up early to tell us this.

In March 2016, output decreased sharply again in the manufacturing industry (-0.9% after -1.4% in February)…..Over the first quarter of 2016, output diminished in the manufacturing industry (-0.7% q-o-q)

This is becoming a familiar state of play although there are individual differences as for example annual growth in France remains more positive at 0.9%. Although over the credit crunch era it has not done as well as Germany as growth since 2010 has been a mere 1.2%. If we move to the Markit business surveys we get more gloom.

“The French manufacturing sector slipped further into contraction during April, precipitated by a steeper reduction in new order intakes.”


The bad news just keeps on coming here as you can see from this morning’s official communique.

Manufacturing production decreased by 2.5% (working day adjusted)

This adds to the disappointing survey data I looked at only yesterday and opens the door to a further decline in something which had previously seen some flickerings of hope.

The United States

If German manufacturing is an engine for Euro area growth then manufacturing in the United States has a similar role for the world economy. I pointed out last December that revisions had meant the past was no longer as good as it had been reported and now we see this.

Manufacturing output decreased 0.3 percent in March…..For the first quarter, manufacturing output moved up at an annual rate of 0.6 percent, roughly reversing its small decrease in the fourth quarter of last year.

So the sector is treading water overall maybe as we note on a monthly basis 2016 has gone 0.4%,-0.1% and now -0.3%. Oh and this year’s annual revision again told us that the past was not as good as we had been told.

The revised, smaller increases for manufacturing for 2014 and 2015 resulted from rates of change for many durable and nondurable goods industries that are lower than reported earlier.

Looking forwards the JP Morgan business survey was not optimistic.

April data indicated that U.S. manufacturers started the second quarter of 2016 with a renewed slowdown in production and new business growth…….Output volumes were close to stagnation in April, with the latest survey pointing to the weakest rise since the current period of expansion began in October 2009.


There is much to consider here and there is an element of the world changing. What I mean by this is the inexorable rise of the service sector which can be illustrated by the music industry. Last week the Financial Times reported this about Warner Music.

Warner Music Group has become the first major record company to report that streaming has become its largest source of revenue, surpassing sales of physical formats such as CDs and vinyl……..Overall digital revenue increased 20 per cent to $328m, offsetting declines in physical formats.

Thus a service replaces something which is physically produced. The online stream or cloud replaces the physical production and possession of an acetate ( reads better I think than LP…) or a CD or if we stretch our memories a cassette or cartridge. If I may divert for a moment this illustrates another theme where we rent rather than own things (which in itself is a reversion to say the 1970s intriguingly when we were poorer…) which is of consequence for those who have read the recent Apple I-Tunes stole my music blog. There are gains  in not having to physically store things and use up scarce resources in production but also losses often in terms of the music’s quality ( I mean bits per second here) and matters like album sleeve art such as the prism on the cover of Dark Side of the Moon. Oh and has actual music quality fallen too and is that a coincidence?

But as well as that above there is a  secular or tectonic plate shift to cheaper emerging economies. Also if we are to pursue the Holy Grail of annual economic growth combined with finite resources then until we can mine asteroids,comets and planets then manufacturing has to see a relative decline.

Perhaps also we need to double-check how we define manufacturing…..