France: slow economic recovery will not save Hollande in time
- The French economy performed exceptionally well in the first quarter of 2016 but ground to a halt in the second quarter of 2016
- We expect the cyclical recovery to increase this year to 1¼% and to slow down to 1% in 2017
- Any recovery is unlikely to dent the high unemployment figure and will thereby not save President Hollande in time for next year’s elections
Mixed first half of 2016
The French economy had a great start of the year with a growth figure that was revised upwards twice to 0.7% quarter-on-quarter (q-o-q) for the first three months of 2016 (figure 1). Things quickly took a turn for the worse as the economy ground to a halt in the second quarter of 2016 (0.0%). Consumption, the traditional engine of French growth, came to a complete standstill (0.0%) after expanding at a healthy pace in the first quarter (1.2%). Consumption was dragged down by strikes in the transport sector, obstructing consumers to reach shops to make purchases. Investment slumped from an encouraging 1.3% q-o-q in the first quarter to a slight contraction in the second. Net exports did contribute positively, but this was driven by shrinking imports while export growth remained negative, reflecting France’s competitiveness performance (figure 2).
European championship no panacea
The poor growth performance in the second quarter was caused by many one-off factors: in addition to strikes being a drag on consumption, they also led to drops in output at especially refineries and to infrastructural problems. Large floods in May and June caused economic damage. The football euro championship, while increasing some forms of spending, probably caused less activity in other sectors. In the same vein, we consider the strong performance at the start of the year also to be driven by many one-off factors, such as a compensation of the slump in consumption after the November 2015 terrorist attacks and the buying of tickets for the European Football Championship by French consumers in those first months. As such, we believe that the average performance of the French economy over the first half 2016 is in line with what we expected and even slightly above potential.
Growth to slow down in remainder of 2016
The slowdown in the second quarter is likely a harbinger of things to come. While the immediate impact of the UK’s Brexit vote on European economies so far appears to be small, the challenges that the French economy faces are real and significant. The economy’s growth mostly relies on consumption and faces bad news on that front. While inflation is around 0% in the first half of the year, it is likely to increase swiftly in the second half of the year to 1-1.5% as the effect from lower oil prices dissipates. This means household spending is likely to slow as wage growth remains stagnant (figure 3). The waning support of a weak euro will weigh on already negative export growth. Structurally, we believe French potential growth is only around 1%, as productivity growth suffers from a rigid labour market and lack of liberalisations, quelling French productivity. We expect growth of 0.2-0.3% (q-o-q) in the rest of the year, 1¼% in the whole year, and 1% in 2017 (table 1).
Elections increasingly uncertain after further terrorist outlook
France holds presidential elections in April and May 2017. The terrorist attacks in Nice have reinforced our perception that President Francois Hollande will not pass the first round of the elections to the run-off, as polls indicate (figure 4). That means a run-off between Ms. Le Pen of the far-right Front National and the candidate from the centre-right party, Les Republicains, is feasible, with the latter candidate subsequently winning. Ms. Le Pen’s divisive politics make it very tough for her to win the presidency. Former prime minister Juppé looked poised to win the primaries for the Republicains nomination in November, which would be the de facto presidential election. However, in wake of the recent terrorist attacks, Mr. Sarkozy is moving up in the polls due to his strong and aggressive response (now at 30% vs. Mr Juppé’s 37%). If Sarkozy becomes the candidate for the Republicans, the elections suddenly become much more uncertain as centrist candidates would then throw their hat in the ring and President Hollande has a better chance of making the run-off.