France: recovery stuck in the starting blocks
The French economy registered growth of 0.0% in 2014Q1 q-o-q, caused by weak consumer spending, poor business investment and declining net exports. We expect these trends to continue and expect therefore a very modest recovery going forward.
Stagnating French economy
French GDP volume was unchanged in 14Q1 q-o-q, after a small increase in 13Q4 (figure 1). The expenditure breakdown was disappointing, as private consumption (-0.5%), private investment (-1), business investments (-0.5%) and net exports (-0.2%) declined on a quarterly basis. Together they subtracted 0.7%-point from growth. While both were positive, import growth exceeded export growth resulting in a negative contribution of net exports. Inventory formation and government consumption contributed respectively +0.6%-point and +0.1%-point to growth. Looking forward, we do not expect the French government to launch significant additional austerity measures in 2014 and 2015. Hence, we expect the budget deficit will remain above 3%-GDP next year. Based on our expectation of an only very modest French recovery in the coming quarters, we expect GDP growth to be around ¾% this year and 1¼% in 2015 (table 1). The Spring Forecast 2014 by the European Commission is a bit more optimistic with GDP growth of 1% this year. Although this forecast includes austerity measures targeted at 2014, it does not include the disappointing performance of private consumption and investments in the first quarter of this year and therefore seems a bit too optimistic.
Major fall-back of private consumption
Household consumption declined by 0.5% q-o-q in 14Q1 after increasing by 0.2% q-o-q in 13Q4. This decline can be explained by a couple of factors. First, VAT increases in January resulted in frontloaded consumption in 13Q4 (figure 2). This is reflected among others in a drop in car purchases in 14Q1 after a dynamic 13Q4. Second, expenditure on food products declined, especially on tobacco after a price increase in January. Third, due to temperatures above their seasonal average, total expenditure on energy declined for the third consecutive quarter. Looking forward, private consumption expenditures seems to strengthen as expenditure on food, automobiles and household equipment increased in April. That said, ongoing fiscal consolidation will suppress growth, as 50 billion euro of austerity measures will be launched from 2015 onwards. Furthermore, unemployment (10.4 in March) is expected to remain high, as the labour force is still increasing and employers are likely to continue to give priority to increasing productivity and profit margins over job creation. We therefore expect the unemployment rate to fall gradually starting in early 2015 (figure 4). Moreover, weak consumer confidence weigh on household spending (figure 3). In summary, unemployment remains high and households’ confidence and consumptions are still weak. This reinforces our view of the French recovery, namely one which is stuck in the starting blocks.
Gloomy investment climate
After three quarters of growth, business investment declined by 0.5% q-o-q in 14Q1. Looking forward, mixed signals show a blurred picture of the investment climate. There are several factors which we expect to stimulate investment going forward. First, despite its expected decline in 14Q2, the capacity utilization rate in the manufacturing sector followed a gradual upward trend during recent quarters. Second, labour tax reforms planned under the ‘Responsibility Pact’ are set to improve firms’ profit margins and hence their investment capacity. On the downside however, although the policy of president Hollande seems more business-friendly, recent municipal and European Parliamentary election results show that support for his government is waning. This does not bode well for further substantial business-friendly policy. Furthermore, the manufacturing and services PMI for May have surprised on the downside as they decreased to 49.6 and 49.1 respectively, so that the levels are now again in the contraction zone (figure 5). On balance, we expect a moderate recovery of business investment going forward.