RaboResearch - Economic Research

France: improving conditions

Economic Update

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After small quarterly GDP contractions in previous quarters, France might be able to prevent another GDP contraction in 13Q2. In specific, this expectation is based on better-than-expected household consumption and industrial production figures in 13Q2. More timely sentiment indicators have improved further in July, which bodes well for the economic recovery going into the third quarter. The expectation of falling inflation in the coming months amid favourable base effects should further support consumer spending. Overall, we take note of a relatively unexpected improvement of economic conditions. But we should stress that the recovery is not robust enough to put a dent in the jobless rate. 

Year-on-year change in %

Source: Reuters EcoWin, Rabobank

Consumption might underpin growth in 13Q2

Household consumption of goods decreased by -0.8% m-o-m in June. However, it managed to grow in 13Q2 as a whole (+0.3% q-o-q), which is an improvement compared to the contraction seen in the previous two quarters. Quarterly growth was not only supported by the volatile energy component but also by the consumption of manufactured goods, which better reflects the underlying trend. As the consumption of goods represents around 50% of total household consumption, we expect consumer spending to support GDP growth in 13Q2 more firmly than in the previous quarters. Looking forward, it is encouraging that consumer confidence finally increased in July, albeit from very low levels.  Household consumption of goods

Source: Reuters EcoWin

Bright spots in the industrial sector

Also developments in the industrial sector provide an indication of a stronger quarterly GDP growth figure in 13Q2 than in previous quarters. If we assume industrial production (IP) stagnated in June, then IP will increase by 1.9% q-o-q in 13Q2. Note that IP contracted by 1.9% and 0.3% in 12Q4 and 13Q1, respectively. The recent manufacturing PMIs show that the near-term outlook has improved as well. But before we get ahead of ourselves, we must remember that the capacity utilisation rate in the manufacturing sector is expected to stagnate in 13Q3, according to the European Commission survey. This does not bode well for investments with the aim of expanding production capacity.

Production manufacturing industry

Remarkable rise of sentiment indicators

The improvement of the manufacturing PMI is reflected in other sentiment indicators. Compared to the other eurozone countries, it took some time for the French Economic Sentiment Indicator to pick up, but since May there is a clear improvement. Also the INSEE indices of consumer and producer confidence increased further in July. Taken at face value, these sentiment levels point to stronger economic activity in 13Q3. If the improvement continues, France will slowly move away from its mild recession. We must stress, however, that surveys on future employment did not improve in recent months, which dims hopes for a quick labour market recovery.

Economic sentiment

Source: Reuters EcoWin

Increasing inflation seems temporary

After a steady drop in inflation since early 2012, consumer prices increased slightly in May and June. However, we do not expect this upward trend to continue in the coming months. Higher energy prices were the main reason for the pick up in June, but this effect should prove temporary as oil prices dropped steeply in June 2012 but rebounded significantly a month later. As a result, the y-o-y change of energy prices will probably contribute negatively to the headline inflation figure. Against the weak economic backdrop, we do not expect core inflation to increase anytime soon. This should support real incomes this year and potentially buoy consumer spending. Increasing inflation seems temporary

Source: Reuters EcoWin

Pension reform under way, but don’t expect much

President Hollande is pushing for a pension reform as it became clear that, without any policy changes, the state pension system will have a funding gap of €20bn by 2020. The government already signalled that the minimum retirement age (62 years) will not be raised, which is disappointing given that France’s current effective retirement age is very low. Despite the fact that the contribution period for receiving pension benefits might be lengthened beyond the current 41.5 years, we doubt that the proposal will be ambitious enough to make the pension system sustainable over the longer term. Needless to say that this will further weigh on the already weak public finances of France.

Source: OECD

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