RaboResearch - Economic Research

France: at last, economic growth

Economic Update

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  • Real GDP growth in France increased by 0.3% q-o-q in the third quarter of 2014.
  • We expect private consumption to keep growing and act as the main driver of growth in 2015.
  • Quarterly fixed investments growth is expected to remain negative in the last quarter of 2014 and to improve during 2015, but not enough to turn the yearly 2015 figure positive.

Finally returning to economic growth

The French GDP volume increased by 0.3% q-o-q in the third quarter of 2014, after a slight decline in the second quarter (-0.1% q-o-q). Growth was once again driven by the traditional drivers, namely household consumption and general government expenditures (figure 1). Household consumption growth decelerated slightly to 0.2% in the third quarter after 0.3% in the second quarter of 2014, which was mainly due to a fall in food consumption, clothing expenditure and car purchases.

The negative contribution of net foreign trade (-0.2% q-o-q in the third quarter) is less worrying than it seems: it masks a rebound of exports (0.5% q-o-q in the third quarter) and fast rise of imports (1.1% q-o-q in the third quarter). Less positive is the 0.6% q-o-q fall in total gross fixed capital formation, which shrank for the fourth consecutive quarter.

Table 1: Forecast table
Table 1: Forecast tableSource: Rabobank
Figure 1: Growth supported by private and public consumption
Figure 1: Growth supported by private and public consumptionSource: Macrobond

Investment climate remains gloomy

Going forward we expect private consumption growth to remain positive (around ¼% y-o-y in 2014 and 1% y-o-y in 2015) and act as the main driver of growth in 2015. We expect a gradual pick up of consumption, supported by a slight increase in employment, low inflation (0.5% y-o-y in October) and tax cuts for low income households. But since unemployment (10.5% in October) will likely stay at a high level (figure 2), we expect the contribution of private consumption to GDP to remain muted.

Figure 2: Unemployment is expected to stay at a high level
Figure 2: Unemployment is expected to stay at a high levelSource: Macrobond

We expect the quarterly growth in investments to remain negative in the last quarter of 2014 and to improve during 2015, but the yearly growth rate for 2015 to remain negative (around -1½% y-o-y in 2014 and -½% y-o-y in 2015). Sentiment indicators support this view as they suggest that business confidence has remained weak in the fourth quarter. For example, the manufacturing PMI fell to 48.4 in November, well beneath the no-change level of 50. Moreover, this was the seventh month in a row that the PMI was below 50 (figure 3). Furthermore, according to the European Commission, the capacity utilization rate in the manufacturing sector is expected to decrease in the fourth quarter of 2014, which does not bode well for investments with the aim of expanding production capacity (figure 4).

Figure 3: PMI remains weak
Figure 3: PMI remains weakSource: Bloomberg
Figure 4: Capacity utilisation rate decreases again
Figure 4: Capacity utilisation rate decreases again Source: Macrobond

There are also some positive factors for the French manufacturing sector. The decline of the euro, the falling oil prices and the efforts of the government in favour of companies planned under the Responsibility and Solidarity Pact, should allow profit margins to recover. But the positive effect on investment will only materialize with a lag. We therefore expect investment growth to improve during 2015 but not enough to turn the yearly 2015 figure positive.

Will the government obey EU fiscal rules?

The European Commission (EC) has decided to delay its final decision regarding France’s budget plans until March 2015. On 28 November, the EC gave the government more time on the understanding that France continues to implement structural reforms. In addition, Finance Minister Michel Sapin announced a formal revision of the 2015 projected deficit to 4.1% of GDP from 4.3% of GDP, thanks to €3.6 billion of savings the government presented at the end of October. However, this will not be enough to formally obey the EU rules. To avoid a fine, the government of President Francois Hollande may have to introduce further austerity measures and particularly, accelerate the pace of implementing growth enhancing reforms. Due to the unpopularity of president Hollande and the Socialist Party’s internal disagreement on these issues, both will be difficult. We expect achieving additional spending cuts on top of the €21 billion already planned for 2015 will be unlikely. Regarding the structural reforms, a couple of initiatives are already in the pipelines, but the passage of these through the parliament will remain difficult. As for the effects on the French economy, spending cuts may impede economic growth in 2015, but structural reforms are likely to increase growth and to have a positive impact on the sustainability of public finances over the medium to long term.

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