France: A jobless recovery
A strong GDP figure in 13Q2 and rising sentiment levels show that economic conditions are improving. That said, the GDP figure was boosted by temporary factors while the rigid labour market does not show any signs of recovery yet.
Temporary factors boost GDP growth
After several quarters of minor GDP contraction, the French economy grew in 13Q2 by 0.5% q-o-q (figure 1). Although this was better than expected, there seem to be temporary factors that have boosted growth. To start with the positive news, both exports and business investment performed much better than in previous quarters. Exports grew by 2.0% q-o-q –while comparable import growth prevented a positive contribution of net exports to GDP– and business investment did not decline anymore after six quarterly contractions in a row. As for the somewhat less positive news, private consumption growth (+0.4% q-o-q) was partly driven by an unseasonably cold spring, which led to higher energy expenditure. Furthermore, a strong rebound in the production of transport equipment (e.g. cars, aircrafts), which tends to be volatile, boosted industrial production. According to the French statistics office, this may explain the positive contribution of stock formation in 13Q2 (+0.2%-points). To sum up, although the quarterly figure is clearly positive, one should keep in mind that it probably overstates the strength of the underlying recovery. Nevertheless, due to the non-negligible impact on the annual figure, we have adjusted our growth forecast upward for this year from –¼% to +¼% (table 1). Note that this adjustment also reflects the slightly better economic outlook.
Rising sentiment, but lower GDP growth in 13Q3?
The recent rise of several sentiment indicators suggests that the recovery is finally gaining some momentum. The Economic Sentiment Indicator (ESI) increased in August for the fourth month in a row (figure 2). This increase is mainly driven by higher consumer confidence. To be sure, this does not imply that households will go on a spending spree as large tax hikes and the ailing labour market still act as significant headwinds. This is perhaps why the ‘major purchases in the next 12 months’ sub-index did not improve at all in recent months. Also sentiment among purchasing managers (PMI) increased significantly in recent months. While the PMI manufacturing is still slightly below the neutral level of 50, the rising new orders sub-component points to a pickup in demand in the coming months. Even though the improvement of sentiment is clearly positive, we still expect only modest GDP growth in 13Q3. Due to the temporary factors mentioned above, a negative rebound of energy consumption and manufacturing production seems realistic. The latter seems confirmed by July’s figure for manufacturing production, which contracted on a monthly basis for the third month in a row (figure 3). Unsurprisingly, this was largely driven by a bounce back of transport equipment production.
Rigid labour market remains depressed
Employment contracted in 13Q2 (-0.2% q-o-q) for the fifth quarter in a row (figure 4). Jobs were lost in all sectors, with the largest contraction observed in the industrial sector (-0.6% q-o-q). As the labour force continued to grow, the unemployment rate rose further to 11% in July. Looking forward, indices of employment expectation show that entrepreneurs are becoming slightly less pessimistic about their hiring plans, especially in the services sector. Having said that, given the high unemployment rate and the sharp drop in inflation since end 2012, it is surprising that there is no significant downward pressure on wage growth yet (figure 5). The solid growth of monthly earnings reduces the attractiveness of hiring new employees and does not help France to regain its lost price competitiveness.