RaboResearch - Economic Research

France: Slow but steady economic growth

Economic Update

  • France’s domestically orientated economic model is not as vulnerable for the current industrial malaise as other eurozone countries
  • Growth in private consumption is driven by a decrease of the unemployment rate. The pension protests are affecting consumer confidence however, although we expect the final impact to be small
  • Both exports and imports seem to have stabilized. A downside to exports could be the impact of additional US tariffs on French goods
  • For 2020 we expect a GDP growth of 1.1%

In times of an economic slowdown, France’s economy proves to be robust

Recently, France has emerged as a leading economy in the eurozone. Where other large economies, such as Italy and Germany, are stagnating, France continues to show robust, albeit slow growth. The French economy is more domestically oriented and relies less on exports than the German economy. As such, the slowdown in world trade has had less impact on the French economy, and more specifically its manufacturing sector.

On top of that, the domestic market remains strong, due to which demand for manufactured goods has not weakened as much as it has in other eurozone countries (figure 1). Sentiment indicators are signaling a modest expansion in other sectors as well (figure 2).

Figure 1: France’s manufacturing sector is holding up well
Figure 1: France’s manufacturing sector is holding up wellSource: Markit
Figure 2: PMIs still indicate (modest) growth
Figure 2: PMIs still indicate (modest) growthSource: Markit

Strong labor market continues to support growth

France’s robust growth is mainly fueled by a strong labor market. President Macron’s labor reforms and favorable economic conditions have driven unemployment rates down from double digits to around 8% (figure 3). With more labor reforms, such as trimming unemployment insurance, we expect a further decline of the unemployment rate. We do not deem president Macron’s goal, to lower unemployment to 7% by 2022, impossible. Combined with a continued moderate real wage growth, these favorable labor market conditions lift domestic consumption and business confidence.

Figure 3: The unemployment rate dropped significantly
Figure 3: The unemployment rate dropped significantlySource: INSEE
Figure 4: Protests affect consumer confidence (shaded area)
Figure 4: Protests affect consumer confidence (shaded area)Source: ECFIN, INSEE

However, the labor union strikes could throw in a wrench. The strikes that started in the beginning of December have significantly impacted retail sales in the large cities, but retail sales outside these cities have been largely left untouched. INSEE, the French statistical office, estimated that the yellow vest protests in 2018 lowered GDP growth by 0.1pp. Given the relatively small scale of the current protests compared to the yellow vests protests, we do not expect the current protests to have a significant impact on GDP growth. That said, there has already been a small effect on consumer confidence (figure 4). Unfortunately, hard data on, for example, retail sales is not available yet.

The pension protest movement seems to be losing momentum: less than half of the population supports or symphatises with the movement. With the support, the intensity of the protests has also dwindled. Nonetheless, only a similar number of people support the reforms. So even though the French finance minister, Bruno le Maire, stated that a “compromise has never been so close”, sealing the deal will be a tough nut to crack. After the government promised to drop plans to increase the retirement age from 62 to 64, there is little room left to make concessions. Especially since the government budget is at its limits after the concessions made to the yellow-vest protesters earlier.

Exports and imports seem to have come to a halt

Since France’s economy is domestically orientated, the balance of trade is not a focal point when considering contributions to GDP growth. Moreover, the balance of trade seems to be stabilizing since both exports and imports seem to have come to a halt (figure 5).

Figure 5: Both exports and imports are stalling
Figure 5: Both exports and imports are stallingSource: INSEE, European Commission

A significant downside risk, however, is a deterioration of the trade relationship with the United States. After France implemented the digital services tax, the US threatened to counter with 100% tariffs on up to USD 2.4bn of French goods, including champagne and luxury handbags. Even though these tariffs cover less than 0.5% of total French exports, this collision is yet another episode in the already frustrated trade relationship between the EU and the US. An escalation on this front, resulting in for example tariffs on European cars, could lead to more severe consequences.

The year ahead

For 2020 we expect similar GDP growth as in 2019 (which is expected to be around 1.1%). This growth will be driven by private consumption and business investments. We expect the growth contribution from government consumption to be modest. With a debt-to-GDP ratio of 99.5% (2019Q2), there is an increased focus from the European Commission on France’s finances and therefore little room for expansion. Both domestic and foreign unrest could lower growth in France, but escalation of issues of the current protests or the trade dispute with the United States are not taken into account in our forecast.

Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

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