Brief France Oxford Economics

Bob Brown

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23 Jul Country Economic Forecast 2014 France France Highlights  France continues to disappoint and to underperform  Furthermore, the external competitiveness of France vis-à-vis its Eurozone peers. The 1.7% drop in has continued to deteriorate since the beginning of industrial production in May versus April was larger the year. France is now posting the highest trade than in Italy and the sharpest in over 20 months. Both deficit of the large Eurozone countries. Its market investment and consumer goods production were share of exports outside the Eurozone has eroded down, with overall manufacturing production falling by further, limiting thereby the benefits from the modest 2.3% compared to April. Against this backdrop, we ongoing recovery of world trade. Exports are set to have revised down slightly our GDP forecasts: we grow by just 3% on average in 2014-2015. have cut the 2014 forecast to 0.6% from 0.7%, and  Meanwhile, earnings before taxes posted by French the 2015 forecast to 1.1% from 1.2%. companies have stagnated, in contrast to the rest of  Looking into the second half of the year, a gloomy the Eurozone.

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• Publié par: r_jules
• Publié le: 24 juillet 2014
• Nombre de lectures: 16
• Langue: English

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23 Jul 2014 Country Economic Forecast

France France Highlights  France continues to disappoint and to underperform  Furthermore, the external competitiveness of France visàvis its Eurozone peers. The 1.7% drop inhas continued to deteriorate since the beginning of industrial production in May versus April was largerthe year. France is now posting the highest trade than in Italy and the sharpest in over 20 months. Bothdeficit of the large Eurozone countries. Its market investment and consumer goods production wereshare of exports outside the Eurozone has eroded down, with overall manufacturing production falling byfurther, limiting thereby the benefits from the modest 2.3% compared to April. Against this backdrop, weongoing recovery of world trade. Exports are set to have revised down slightly our GDP forecasts: wegrow by just 3% on average in 20142015. have cut the 2014 forecast to 0.6% from 0.7%, and  Meanwhile, earnings before taxes posted by French the 2015 forecast to 1.1% from 1.2%. companies have stagnated, in contrast to the rest of  the Eurozone. As French companies also displayLooking into the second half of the year, a gloomy outlook for the labour market with a persistently highamong the lowest profit margins in the Eurozone, this level of unemployment and a more modestwill limit further the appetite of French companies to progression of wages in France than in the Eurozoneinvest in the period ahead compared to the rest of the will continue to weigh on domestic demand. We doEurozone. Finally, the broad outlines of the 2015 not expect consumer spending to benefit significantly2017 budgets released this week confirm that fiscal from the current low inflation. In June, CPI inflationconsolidation will remain a drag on growth–we stood at only 0.5%, in line with the Eurozone figure,expect current government spending to grow by just but at its lowest level since November 2009.0.4% or so per year over this period.

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

Forecast Overview

Recovery lagging Eurozone rivals… France’s recovery continues at only the most modest rate. mixed bag of PMI results and business surveys suggests that service sector activity ticked up in recent months, but manufacturing output fell sharply in June after a run of modest falls. GDP growth in the first quarter was revised up marginally to 0.1% (from zero on the provisional estimate), and with all the monthly data indicating little acceleration since we expect a similar rate in the second. France’s recovery isbadly lagging Eurozone rivals, for example Spain and Belgium, which grew at 0.4% in Q1, and Germany, which grew at 0.8%.

…and onlymodest pickup in store Looking ahead, France will continue to trail reforming peripherals and the more competitive core countries. After growth of 0.6% this year, expansionof 1.1% is forecast for 2015 and 1.3% for 2016. We expect several structural factors to weigh on growth over the medium term:

 Loss of competitiveness–France has seen a steady erosion of competitiveness in recent years, with labour costs rising while peripherals have cut costs and more flexible core economies have at least checked their growth. As such, exports will grow by 34% pa in the medium term, 0.51% points slower than Germany.

 Insipidinvestment–plenty of spare capacity, and a pincer movement of rising input costs and falling output prices, will delay capital spending. We expect modest growth in business investment: 1% this year, rising to 2.6% in 2015, and just below 3% in 2016.

 Highunemployment–in light of weaker exports and investment spending than in previous recoveries the labour market and consumer rebound will be tempered. We expect household spending growth of just 0.3% in 2014, and 1.5% or so per year thereafter, compared to 2.6% per year in the decade to 2007.

 Fiscalconsolidation–we expect tightening of around 0.70.8% of GDP a year over the next couple of years. Following the VAT hike, consolidation will primarily be achieved through spending cutsof €15bn in 2014and a further €50bnin 201517 (although most of these cuts have yet to be specified). The fiscal tightening planned in France is proportionately greater than that in Germany and Italy, and similar to that in Spain.

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul 2014 France

In common with other core Eurozone economies, price pressures in France have been steadily easing over the past year or so. Annual inflation in June was 0.6%, down from 0.8% in May, and core inflation slipped to 0.9%. With firms’ pricing power affected by the weakness of the recovery, along with the degree of spare capacity, inflation will stay below 1% this year and average just 1.4% in 2015.

Work to do to ensure fiscal sustainability France still has a way to go to put public debt on a more sustainable path. At over 93% and projected to rise to over 100%, France’s debt to GDP ratio is among the highest in the core Eurozone. Generous pension entitlements and a relatively early retirement age are likely to mean this persists despite government efforts to keep spending under control in the near term.

This increases vulnerability to future spikes in investor risk aversion, as well as to the probable longerterm rise in borrowing costs as the wider Eurozone recovers. An ambitious reform package to put social entitlements on a more sustainable footing would go some way to tackling this fiscal vulnerability.

Germanstyle reforms for France? The recent success of the German economy suggests that the returns in the long run from an appropriate set of labour market reforms can be significant. Modest progress was made in this respect in France earlier this year, with a loosening of regulations on terminating permanent contracts, but this came after a concession that further tightens the regulation of temporary employment contracts.

fter suffering a substantial defeat in the municipal elections in March President Hollande reshuffled his cabinet, promoting the architect of the labour reforms to the post of Finance Minister. Further modest measures were announced, including cuts to corporation tax and employees’ social contributions. But political intervention in takeover bids, including that mounted recently for part of Alstom, a worldleading French engineering firm, suggests there remains an uneasy balance between grudging reform and continued interventionism. This situation seems likely to persist, particularly in light of the success of the National Front in the recent European elections, which might pressurise mainstream parties to compete on the grounds of who would “protect” French workers and business best.

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

Risk Assessment

We estimate that economic risk has ticked up from 2013 to 2014,following further downgrades of France’s sovereign credit rating and a recovery that has lagged other Eurozone economies. Risks remain well below the global average, but the gap with Germany has widened.

Emerging risks ‘Dirigiste’ revival–the government’s recent investment in Peugeot and the decision to block a merger between lstom and GE that the French firm’s board described as “practically perfect”underline a persistent belief the state has a role to play in directing economic activity. This seems likely to undermine firms’ competitiveness, blunt the efficiency of labour markets, and puts public money at risk.Yet support for ‘dirigisme’ remains strong, so further tinkering seems possible.

‘German’ reform scenario–an ambitious reform agenda is an upside risk to themediumtermforecast. Further reforms to lower the cost of hiring, in particular young workers (a quarter of whom are jobless) would help boost competitiveness, as well as consumer spending power. The template offered by Germany in the early 2000s is a good example.

Key risk scenarios Eurozone slumps into deflation–inflation has edged lower and France clearly remains at risk of deflation or “lowflation”at the very least; if nominal GDP fell (or only grewvery modestly), the real burden of France’s debt would increase, demanding an accelerated fiscal consolidation. Alternatively, if deflation took hold in the wider Eurozone, France’s export markets would be depressed, pushing the economy back into recession and risking debt sustainability. France would not return to growth until 2017 with the unemployment rate rising significantly. China banking crisis–France’s direct trade and financial links with China are relatively modest, but the impact on global risk of a Chinese banking crisis would knockFrance’s recovery in line with the rest of the world. Slumping exports and investment would mean another two years of recession in 201415, and demand a round of austerity measures to ensure public debt remained stable relative to GDP.

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

LongTerm Prospects Longterm growth barely above 1% Theeconomy’s potential has been significantly weakened by the global and financial crisis. We estimate that potential growth over the next decade will average just over 1%, well below the precrisis trend. Low potential growth is accounted for by the protracted restructuring of the economy combined with a worsening of demographic trends. With both public and private budgets very tight, spending on innovation is likely to suffer. In 2012, France spent 00 per head on R&D, lower than the€950 spent in Germany. Over time, this lack of investment could hamper the economy’s productive potential. We assume that total factor productivity growth in the next decade will be similar to that in the previous one. But this could prove optimistic. We expect the working age population to decrease noticeably over the next ten years. This is likely to be partly offset by increases in the participation rate. Overall therefore, the labour supply will be broadly stagnant over the next decade, one of the factors undermining potential growth.

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

Background France was a founder member of both the EEC, the forerunner to the EU, in 1957 and European Monetary Union (EMU), adopting the euro as an accounting unit in 1999 and then as a currency in 2002. The political elite in France has been one of the main driving forces of EU development, keen to stamp a French trademark on European institutions and Europe as a whole. In developing this role, politicians focus on preserving and spreading French culture and ideals, rather than forging a new European identity. Indeed, the French electorate is much more suspicious of globalisation and the integration of France into a wider European community, as was illustrated by voters’ rejection of the European constitution in May 2005. The French economy is the fifth largest in the world (in US$ terms)–behind the US, Japan, China and Germany (having overtaken the UK courtesy of sterling’s fall against the euro in 2008) –and the fourth and fifth largest exporter of commercial services and merchandise goods respectively. The majority of this trade is with the rest of the EU, with the other major European economies, Germany, Italy and the UK, accounting for around a third of total exports. The political system in France is classified as a semipresidential representative republic, where the president is directly elected and is head of state. The prime minister is head of government and executive authority rests with the government, while parliament–the National Assembly and Senate–are responsible for passing legislation. Unlike most other European countries, the president is the main political force in France: he largely determines foreign policy and plays a significant role in setting the direction of domestic policy through his ability to name the prime minister. The president’s profile lies somewhere in between that of a US and a typical European president. However, the power of the presidency can be restricted during cohabitation when an opposing political faction to the president controls the National Assembly  the president is weakened because he is forced to name an opponent as prime minister. The shortening of the presidential term from seven to five years has implied that presidential elections are held only a few weeks before the parliamentary elections, making periods of cohabitation less likely. Francois Hollande was elected president in May 2012 on an antifiscal austerity campaign. While his campaign programme did include a significant reduction of the public deficit to achieve balance by 2017, the financing of extra spending measures, let alone cuts to other types of spending, remained unclear. By pushing for a Europeanwide change of policy from a focus on fiscal austerity to measures designed to boost growth, Hollande probably hopes to be able to follow a more relaxed deficit reduction plan. But so far there is no evidence that other governments, notably in Germany, or financial markets will accept a significant slowdown in fiscal restructuring. The government commissioned a report on France’s competitiveness and measures to redress it. The report highlighted labour costs and in particular, employers’ social security contributions as one target to improve competitiveness. The government immediately announced a measure aimed at reducing payroll taxes, which, while notas ambitious as recommended in the report and undermined by a fairly complex structure, constitutes one step in the right direction. persistent thorn in the side of policymakers has been high unemployment, which is above the European average and has been a problem for the past 25 years, with government measures having little success in tackling it. The unemployment rate peaked at 12.3% in 1994, having risen almost continuously from under 3% in the early1970s. Successive governments have tried numerous remedies, including early retirement schemes, job programmes for young people in the state sector, cutting the working week to 35 hours and imposing penalties on companies encouraging early retirement. Reducing unemployment was a key goal of government strategy, with former President Sarkozy’s policies aimed at achieving full employment by the end of his first term in office. But this goal was not achieved as the economy moved into recession in 2009 and the unemployment rate soared towards 10%.

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

Data & Forecasts

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

Economist:Tom Rogers, Senior Eurozone Economist | Tel: [phone] | e-mail:[e-mail]

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23 Jul France 2014

Economist:| e-mail:Tom Rogers, Senior Eurozone Economist | Tel: [phone]

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23 Jul France 2014

Economist:| e-mail:Tom Rogers, Senior Eurozone Economist | Tel: [phone]

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