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France: recovery remains weak

Economic Update

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Recent data show that the French economy did not grow in the first half of 2014 and the outlook for the second half is muted. Furthermore, the labour market remains weak and we expect unemployment to decrease at the end of 2015. 

Reshuffle of the cabinet will not translate into extra reforms

Due to the lower than expected growth and inflation figures of the first half of this year, France will miss its deficit targets for 2014 and, most likely, those for 2015 as well. Over the short term, this means that there is no room for loosening fiscal policy and that the ongoing need to consolidate public finances will remain a drag on domestic demand. Over the long term, the business friendly policy of president Hollande should improve the competitiveness of French firms and therefore enhance growth. However, the announced reforms are insufficient to change France from a consumption driven economy towards a more international competitive and innovative economy, and to put the public finances on a sustainable footing. Nevertheless, further reforms are unlikely, despite the recent reshuffle of the cabinet, given the unpopularity of president Hollande. With the reshuffle of the cabinet, president Hollande sends a signal of his intention to continue with fiscal consolidation hoping for more flexibility on EU fiscal rules.

French economy stagnates in the first half of 2014

In the second quarter of 2014, the volume of the French gross domestic product (GDP) remained stable (0.0%), leaving the first half of 2014 without any growth. The breakdown shows a relatively disappointing picture, as business investments declined and exports were not able to grow, reflecting the structural lack of competitiveness of the French economy (figure 1). Only private and public consumption contributed positively to growth, emphasizing the traditional French growth model of consumption driven growth. Furthermore, imports decelerated slightly (+0.4% after +0.6), and consequently, net export contributed negatively to economic activity (-0.1 points). Going forward, we expect the economic recovery to remain muted in the second half of 2014 resulting in a growth figure of ½% y-o-y for 2014 and to accelerate only modestly in 2015 (around 1¼% y-o-y, table 1). Exports are not expected to provide a significant boost to the economy in the second half of 2014, since activity in the eurozone – France’s main trade partner – remains muted as well. Furthermore, the Ukrainian crisis is acting as a downside risk creating uncertainty and causing both the external and internal environment to deteriorate. The latter is among others reflected in a decrease of the European Commission Economic Sentiment Indicator (ESI) to 95.1 in August (from 95.7 in July).

Figure 1: French GDP-growth
Figure 1: French GDP-growthSource: Reuters EcoWin
Table 1: Forecast table France
Table 1: Forecast table FranceSource: Reuters EcoWin, Rabobank

Weak labour market forms main challenge for private consumption

Private consumption growth accelerated in the second quarter of 2014 (+0.5% q-o-q after -0.5% q-o-q in the first quarter), as global expenditure on energy bounced back in the second quarter (+3.5% after -3.9% in the first quarter) after rather soft weather conditions in the winter. 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 the second half of 2014. Consumption will be supported by the fact that nominal wages are growing much faster (+1.4% y-o-y in 14Q2) than inflation (+0.6% in July, figure 2). However, we expect private consumption growth to be muted for several factors. First, labour market conditions remain weak, with an elevated unemployment rate (10.3% in July). Positive is that employment increased slightly in the second quarter of 2014 (0.1% q-o-q, figure 3) and we expect this trend to continue. However, we don’t think this will bring down the unemployment rate until end 2015, because the labour force is still rising. Furthermore, the high amount of unemployed is expected to put pressure on nominal wage growth. Over the medium term, the French government measures to lower labour costs should help to boost employment growth. However, France’s labour market remains rigid and structural unemployment will not fall substantially without further reforms.

Figure 2: Wage growth still higher than inflation rate
Figure 2: Wage growth still higher than inflation rateSource: Reuters EcoWin
Figure 3: Slight employment growth in second quarter of 2014
Figure 3: Slight employment growth in second quarter of 2014Source: Reuters EcoWin

Second, French consumer confidence remains weak and below its long term average (figure 4). Third, fiscal consolidation will continue to weigh on consumption in the second half of 2014.

Figure 4: Still weak consumer confidence
Figure 4: Still weak consumer confidenceSource: Reuters EcoWin
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