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Moody's Analytics France Outlook Q2 2014

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France Outlook: Bank Lending Stumbles Forward • France’s growth stalled in the first quarter of 2014 but should pick up through the year. • French banks are reluctant to lend to the private sector. • Bankruptcies, credit rationing, and exposure to peripheral countries are the financial sector's biggest concerns. Lending in France continues to falter. French banks are reluctant to lend to the private sector, although the saving rate of French households is elevated and the pool of savings is large. Without lines of credit, many small and medium-size enterprises in France have cash-flow problems, and the number of bankruptcies remains high. Economy slowly picks up France's GDP stalled q/q in the three months to March after increasing 0.3% in the previous quarter. Household consumption, fixed investment and net exports dragged on growth, while inventories and government consumption contributed. The French economy will pick up through 2014. Despite an income tax rate near the highest in Europe and a savings rate of 15.7%—roughly 2.7 percentage points above the euro zone average—French household spending is expected to improve through 2014, despite stalling in the first quarter. The main driver should be increasing consumer confidence, especially as the government has not announced further tax hikes and will now focus on spending cuts and saving plans in public administration. Meanwhile, GDP growth in the euro zone, the U.K.
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France Outlook: Bank Lending Stumbles Forward
growth stalled in the first quarter of 2014 but should pick up through the year. France’s banks are reluctant to lend to the private sector. French credit rationing, and exposure to peripheral countries are the financial sector's biggest Bankruptcies, concerns.
Lending in France continues to falter. French banks are reluctant to lend to the private sector, although the
saving rate of French households is elevated and the pool of savings is large. Without lines of credit, many
small and mediumsize enterprises in France have cashflow problems, and the number of bankruptcies
remains high.
Economy slowly picks up
France's GDP stalled q/q in the three months to March after increasing 0.3% in the previous quarter. Household consumption, fixed investment and net exports dragged on growth, while inventories and government consumption contributed.
The French economy will pick up through 2014. Despite anincome taxrate near the highest in Europe and a
savings rate of15.7%—roughly 2.7 percentage points above the euro zone average—French household
spending is expected to improve through 2014, despite stalling in the first quarter. The main driver should be
increasing consumer confidence, especially as the government has not announced further tax hikes and will
now focus on spending cuts and saving plans in public administration.
Meanwhile, GDP growth in theeuro zone, theU.K., andGermany—the top destinations for French exports— will likely accelerate in 2014, which will help boost French machinery and food exports. Although France will
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continue to post trade deficits, its neighbours' recoveries should enhance the country’s net exports in the
short term.
Likewise, because of improved tax collection—budget revenues have been increasing twice as fast as expenditures—as well as better GDP numbers, France's headline deficit decreased for a fourth consecutive year in 2013. Finalnumbersshow the deficit shrank by €12.2 billion from 2012 to €88.8 billion in 2013, or 4.2% of French GDP for that year. Although the country missed its deficit target by 0.1 percentage point, the underlying trend was positive. With spending cuts announced for 2014, France could reach the 3% of GDP threshold in 2015, by which time it should exit the EU'sExcessive Deficit Procedure.
GDP growth is expected to accelerate in2014to 1.1% but stay well below its longterm average of 1.8%. Private consumption looks set to drive growth, with little help from private investment as low profit margins among nonfinancial businesses have held back new investment. Meanwhile, net exports will likely remain negative with only hints of improvement. Government spending cuts agreed in 2013, and reaffirmed by the new Prime Minister Manuel Valls, are expected to weigh heavily on public consumption.
If the economic situation in France does not improve, the government could intervene and attempt to boost
public consumption to avoid another shortterm recession. But if all goes smoothly, the government could cut
more spending than initially planned and further decrease the deficit.
Banks reluctant to lend
Although the situation has improved in 2014, French banks are still not lending enough to the private sector,
hindering investment and contributing to liquidity problems in many companies. With the wave of
deindustrialization that hit the country after the global financial crisis of 20072008, credit to small and mid
cap companies remains limited.
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Another contributor to the credit crunch is the rationing put in place during the financial crisis, which remains deeply entrenched in the financial sector. Banks tend to charge wildly different interest rates to different companies on the basis of their size and longevity. French interest rate gaps are among the widest in Europe.
To make matters worse, the latest data show some private companies unable to qualify for credit lines at all. In2013, only twothirds of the small to mediumsize businesses that applied for loans from banks received them, and only 60% of such firms were able to borrow as much as they requested. Banks have made it clear they have less confidence in French companies, so screening processes are stricter than they were seven years ago.
French banks have also accumulated the private and public debt of peripheral countries such as Spain and Italy. Although the sovereigndebt crisis has subsided, French banks remain highly cautious. Despite record low moneymarket rates and a pool of savings from households, deposits often remain on the banks’ accounts rather than flowing into the real economy. 3
Tight credit has contributed to problems for French firms. By 2011, large industrial companies werefinancing themselvesusing credit lines from suppliers and issuing bonds. That strategy has since spread to other euro zone countries includingBelgiumand theNetherlands. The decline of longterm bank financing undermines longerterm investment projects and keeps a lid on private sector profitability.
For smaller companies, tight bank lending complicates daily operations and contributes to frequent liquidations due to cashflow problems. Representatives of the French banking sector have said they do want to finance new investment, notoutstanding debts. Yet although shortterm financing is generally not hard for companies to obtain, financing for longerterm projects is far more difficult. Smaller companies are hit hardest, which is why bankruptcies remained elevated in 2013. A vicious cycle exists as the number of bankruptcies restrains bank lending, which in turn increases the odds that more companies will declare bankruptcy.
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Although the French government has promised to aid smaller firms, the initiative has hadlittle effect. More could be done to make funds available to the private sector. If the French government were to consolidate public finances, banks would be less inclined to buy domestic sovereign debt and more motivated to lend to the private sector.
Currently, a major impediment to lending is lowprivate sector profitability. The government of Prime Minister
Valls has pledged to smooth relations with the business sector and has announced a number of measures
that should help improve smallfirm profitability, including a €40 billiontax break. Yet it seems questionable
that these measures alone will significantly boost lending in France.
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