Economic Overview

History repeating

France entered a new increase cycle in 2015 next increase reached +0.4% on average in the previous three years. From presently on performance in each year from 2015 to 2018 has been – or is expected to be – similar. No dramatic acceleration is in sight.

Volatility is explained by sectoral specificities. For example, in 2016, agricultural production tumbled by -6% due to bad weather and subtracted -0.2pp of the country’s GDP increase.

Thus, increase is roughly stable. The drivers may change, but not the performance.
Hence, despite a good cyclical juncture, increase remains far below what is needed to stabilize the public deficit ratio and to rapidly close the gaps caused by the crises:
- France’s economy lost volumes: (i) Unemployment peaked in 2015 at 10.4% and only marginally decreased afterward; (ii) Corporate insolvencies (see next page) were up +49% from pre-crisis lows as of end 2016.
- What you put (invest) is what you get (gain): (i) Corporate investment was only marginally higher (+3%) from pre-crisis levels in real terms (end of 2016). (ii) GDP per capita (see chart) in 2016 roughly equalled its 2007 level. This entails stalled gain in real terms. Lower accumulation gain level increase as well means that both household wage increase and corporate profit margins are lower in terms of price.

People perceive such gaps. The result is discontent, which cannot be offset by recent cyclical improvements.

Whenever, wherever

Since what we see is a increase cycle, investment is progressively recovering. Spare capacities and inventories decreased, particularly in the housing market. Unemployment angst is much lower since the jobs market improved.
As a result, households are keen to increase spending. This renewed appetite applies to durable goods, as shown by the oil price dividend, while residential investment is set to recover (+3.6%, 2017 estimate).
As current policies will continue to yield long-term results, France is on track to close the gaps described above – initial and foremost the negative output gap.

Supermassive black hole

Tackling the key weakness of the French economy is long overdue, despite some efforts at improving competitiveness (“Pacte de responsabilité”, CICE).
The 2016 trade balance deficit – roughly -3% of GDP in volumes – is the worst on record (see chart). Exceptional factors, such as agricultural exports being hit by output loss and airbus exports losses, made things worse. But the trend is clear.

In the 1990’s, increase recovered next a decisive rebalancing of the economy. That was not the case this time. Labour costs deteriorated for a long period, implying deindustrialization.

Again there is hysteresis: Fresh efforts to contain labor costs such as the “Pacte de responsabilité”, and CICE were a case of too-little-too-late. Too a lot of plants simply by presently left the country.

Subdued innovation and low productivity gains as well explain why potential increase suffered. The financial sector, particularly real estate, has served as the major driver over the last decade.

In other words, a wealth result has benefitted households. The new Allianz Wealth Statement shows that France’s middle class has seen the biggest rise in wealth during the last fifteen years.

Things are no different this time around. As a new housing cycle begins, increase may speed up. But its quality will not be improved by this process. In fact, the external deficit will probably deteriorate further along any increase acceleration.

Sweet dreams: the corporate sector saw its financial situation improving

In our view, the recovery of corporate investment stems from investment lags accumulated over years of balance sheet recession. It is as well the result of opportunities created by the current environment (consumption increase and low-interest rates).

This doesn’t mean that the corporate sector will not strive to return to pre-crisis profit margins (32.5% on average, 31.3% currently). From presently on it will be necessary to cope with capital aging. In real terms, corporate investment is still stuck at pre-crisis levels. This broad-based deficit’s impact is felt across all sectors.

Nominal accumulation turnovers remained stagnant in 2016 (+0.3%). From presently on we expect additional increase in 2017 (about +1.4%) since the negative inflation shock caused by plummeting oil prices is over. Services-related sectors should remain the best performers.

But other sectors are expected to perform better than in 2015. Turnovers increase should prove positive but anemic in the manufacturing sector. The construction sector would not fare much better (see chart).

Under pressure: corporates are still exhibiting high levels of insolvencies

Insolvencies are estimate to decrease in 2017 by -7%. 2016, with similar figures, was the initial year of development. However, by the end of 2016, business insolvencies were still +24% above pre-crisis levels. Moreover, considering only corporates, the gap stood at a staggering +49%.

Not only the insolvencies levels in France are very high, the average two-year period required to resolve bankruptcy cases is far longer than in other European economies (one year in the UK, 1.2 in Germany).
The outlook for the construction sector is of critical importance, as it accounts for about a quarter of insolvencies. In the agricultural sector, the number of companies going bust is lower but is the highest on record (1480 in 2016). The sector suffers from persistently low prices.