RaboResearch - Economic Research

France: Nombres rouges

Economic Update

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The French economy slightly contracted in 13Q3, but this was largely due to a bounce back from the strong 13Q2 figure. We expect the recovery to continue, albeit very gradually. Therefore, we do not envisage a robust improvement in the labour market.

GDP contraction due to bounce back

The French economy contracted in 13Q3 by 0.1% q-o-q, after posting a stellar growth figure (+0.5%) in 13Q2 (figure 1). This slowdown was widely expected as the quarterly figure in 13Q2 was boosted by temporary factors. For example, private consumption growth in 13Q2 was partly driven by an unseasonably cold spring. In 13Q3, the expenditure breakdown of GDP was disappointing as both business investment (-0.6% q-o-q) and exports (-1.5% q-o-q) contracted on a quarterly basis. Consumption, both from households and the government, continued to grow, albeit at a slower pace than in 13Q2. Stock formation had the largest positive contribution to growth (+0.5%-point). According to the French statistics office INSEE this has pushed up import growth (+1% q-o-q), as a result of which the contribution of net exports was deep into the negative territory (-0.7%-point). Even if we look through the quarterly volatility, we stress that the underlying recovery remains rather weak. This is supported by November’s sentiment amongst purchasing managers (PMI), which dropped below 50 (figure 2).

Figure 1: Minor contraction in 13Q3
Figure 1: Minor contraction in 13Q3Source: Reuters EcoWin
Figure 2: PMI dips below 50
Figure 2: PMI dips below 50Source: Markit

Labour market remains a headache

There are still no signs of a recovery in the labour market. Employment contracted by a modest 0.1% q-o-q in 13Q3, after declining 0.2% in 13Q2. Note that employment growth needs to pick up significantly to push down the rate of unemployment (11.1% in September). This is because France’s labour force is still growing robustly (figure 3). Given the high unemployment rate it would be desirable if nominal wage growth moderated in line with falling inflation. In recent months, inflation has come down quickly to 0.6% in October, both as a result of a lower contribution of food and energy prices and lower core inflation. However, nominal wage growth proved to be ‘sticky’ as it declined only modestly (figure 4). Although positive real wage growth is welcome for French households as it boosts their purchasing power, it does nothing to help the ailing labour market. 

Figure 3: Employment still contracting
Figure 3: Employment still contractingSource: Reuters EcoWin
Figure 4: Wage growth remains robust
Figure 4: Wage growth remains robustSource: Reuters EcoWin

Budget 2014: Austerity continues

Based on the draft Budget 2014, next year’s fiscal consolidation will remain a significant drag on growth. The planned structural fiscal adjustment is €18bn (0.9%-GDP), which is substantial even if it is slightly less than in previous years. The positive news is that the majority of the measures (€15bn) will be focused on spending cuts instead of tax hikes; this is a welcome policy change given the already very high tax burden in France. Based on the draft Budget, the government expects the deficit to drop from 4.1%-GDP in 2013 to 3.6%-GDP in 2014. However, the European Commission (EC) is somewhat more conservative and expects the deficit to drop to only 3.8%-GDP (figure 5). In their recent budgetary surveillance under the ‘Two-Pack’, the EC stated that the French budget is compliant with the rules of the Stability and Growth Pact, albeit with ‘no margin’ for possible slippage. So at this stage, the EC does not require any further measures. 

Figure 5: Slow decline of budget deficit
Figure 5: Slow decline of budget deficitSource: Reuters EcoWin, European Commission
Table 1: Forecast table
Table 1: Forecast tableSource: Reuters EcoWin, Rabobank
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