RaboResearch - Economic Research

France: Consumption driven recovery

Economic Update


Recent data show that the economic recovery remains in place, albeit very gradual. Ongoing real wage growth will make sure that household consumption –once again– will remain an important driver of GDP growth this year.

More growth and more austerity

The GDP volume rose by 0.3% q-o-q in 13Q4, after stagnating in 13Q3 (figure 1). The breakdown shows a relatively encouraging picture as both business investments (+0.8% q-o-q) and exports (+1.2% q-o-q) were able to grow. Nevertheless, it is disappointing that GDP growth is still largely dependent on both government and household consumption. Together they contributed 0.3%-point to growth, while we have stressed before that France needs to shift from a consumption driven economy towards a more export and investment driven economy. Finally, stock formation subtracted 0.3%-point from growth. Based on our expectation of an only very modest recovery in the coming quarters, we expect GDP growth of around ¾% this year. The Winter Forecast by the European Commission (EC) is a bit more optimistic with GDP growth of 1% this year. But keep in mind that this forecast does not include the effects of extra austerity measures (of at least 0.2%-GDP in 2014) which France needs to implement due to a recent EC recommendation under the Excessive Deficit Procedure (EDP). The Two Pack –a new budgetary regulation which entered into force in 2013- allows the EC for ‘closer monitoring’ when it detects a risk of non-compliance with the deficit deadline under the EDP.

Figure 1: Modest GDP growth in 13Q4
Figure 1: Modest GDP growth in 13Q4Source: Reuters EcoWin
Table 1: Forecast table
Table 1: Forecast tableBron: Source: Reuters EcoWin, Rabobank

Consumption supported by real wage growth

In January, household consumption of goods –representing around 50% of total household consumption- dropped significantly (-2.1% m-o-m). On a 3m/3m basis growth was still solid due to robust consumption growth in November (figure 2). The weak January figure does not bode well for private consumption in 14Q1, but looking at 2014 as a whole we expect ongoing consumption growth (around ½%). Consumption will be supported by the fact that nominal wages are growing much faster (+1.6% y-o-y in 13Q4) than inflation (+0.7% in January, figure 3). It is remarkable that inflation did not rise in January as a VAT-hike was introduced on the 1st of January –the standard VAT rate was hiked from 19.6% to 20.0% and the intermediate rate from 7% to 10%. However, if this was due to an aggressive winter sale –as anecdotal evidence suggests- then it is possible that we will see a lagged effect of the VAT-hike in February’s inflation figure. Nevertheless, the relatively large gap between inflation and nominal wage growth is not expected to be bridged anytime soon. Although positive for household’s purchasing power, it does not help to improve the price competitiveness of French companies.  

Figure 2: Consumption is picking up
Figure 2: Consumption is picking upSource: Reuters EcoWin
Figure 3: Inflation remains at a low level
Figure 3: Inflation remains at a low levelSource: Reuters EcoWin

Investment climate slowly improving

Business investment rose in 13Q4 for the first time after seven quarterly contractions in a row. Going forward, there are several factors which we expect to contribute to a gradual improvement of the investment climate. First of all, the capacity utilisation rate in the manufacturing sector is expected to increase in 14Q1, according to the European Commission (EC) survey (figure 4). Although the utilisation rate is still at a relatively low level, this increase might bode well for investment growth with the aim of expanding production capacity. Secondly, policy measures of president Hollande seem slightly more focused towards the creation of a more favourable business climate, e.g. via lower taxes for corporates and less red tape, according to the recently announced ‘responsibility pact’. That said, rising producer confidence is an important ingredient for future investment, while recent leading indicators show mixed signals. Both the INSEE index of producer confidence and the manufacturing PMI have shown a gradual improvement in recent months, but their current levels are still disappointing (figure 5). On balance, we expect business investment to grow in the coming quarters, albeit only modestly.

Figure 4: Increase of capacity utilisation
Figure 4: Increase of capacity utilisationSource: Reuters EcoWin
Figure 5: PMI still below 50
Figure 5: PMI still below 50Source: Markit, Rabobank

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