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Conjoncture in France, June 2014

Growth returns, but does not take off

Summary

While the improvement in the business climate at the end of 2013 announced a consolidation in the upturn in the advanced economies, 2014 got off to a rather disappointing start. With the notable exception of Germany, activity on the whole was less dynamic than expected in the advanced economies, while the announced slowdown in the emerging economies was confirmed. World trade contracted markedly, for the first time since 2009. Consequently, French exports slowed down sharply, notably those to our partners outside Europe. The weakness of activity in many countries was partly the result of one-off factors. For example, the US economy was handicapped by the harsh winter. Likewise, the emerging countries suffered from further withdrawals of foreign capital. In France, activity stagnated in Q1 due to some specific factors in addition to the contraction in world demand: in particular, the backlash after vehicle purchases were brought forward to before the end of 2013 and the drop in energy expenditure on account of a particularly mild winter.

In spring 2014, these one-off negative factors should fade, allowing a slight upturn. In France, as in the Eurozone, the upturn in activity is however likely to be modest (+0.3% in Q2) as certain lingering factors continue to limit its extent. Households’ purchasing power is indeed increasing too modestly to drive a significant acceleration in households’ consumption and to prevent a continuing slide in investment in new housing. Faced with demand that is still not taking off, and with margin rates that are improving but still low, companies are not inclined to invest. Finally, French exports are unlikely to profit fully from the expected acceleration in world trade, penalised as they are by the past rise in the Euro. Therefore, the business climate as indicated by the business tendency surveys, which hasn’t improve for nine months now, remains at a lower level than its long-term average.

In H2 2014, growth in France should be consolidated, but remain modest (+0.3% per quarter). On average over the year, GDP is likely to grow by 0.7% in 2014, after +0.4% in 2012 and 2013. Within the Eurozone, Italy is set to emerge slowly from the recession, while the upturn should be stronger in Spain. For these two countries, the construction sector is suffering from the poor business climate as it is in France. On the contrary, this sector is more dynamic in both Germany and the UK, thus contributing to a better global outlook in these two countries. The weakness of growth in France suggests that no significant improvement can be expected on the employment front; the slight rise expected in total employment is likely to be driven exclusively by the increase of assisted employment in general government. This is unlikely to be enough to offset the rise in the active population and the unemployment rate should increase slightly through to the end of the year, at 10.2% in France.

The main uncertainty is the trajectory of inflation. The scenario taken here assumes that the return of growth and resulting fall in unemployment in the Eurozone should stabilise inflation. It is possible, however, that the factors that explain the faster than expected fall in inflation in recent months might continue to push it downwards. Conversely, inflation could rise again, notably if the measures announced by the ECB at the beginning of June succeed in lowering the level of the Euro. The activity scenario will also depend on the response of businesses to the new economic policy measures announced by the government. Finally, there are also great uncertainties surrounding the behaviour of European households as regards savings. The assumption here is that the recent fall in their saving rate is not sustainable over the longer term and will therefore ease up gradually, although the improvement in the labour market that seems to be taking form could continue to favour a decrease in precautionary savings. Conversely, it is also possible that households may profit from the improvement in their income to begin building up their savings again and reducing their debt.

General outlook

In the emerging economies, foreign trade surprised by its weakness

In Q1 2014, activity have maintained a moderate growth rate in the emerging economies: +1.1% after +1.2% in Q4 2013, against +1.7% on average between 2000 and 2010. Industrial production slowed down sharply (+0.5% after +1.4%, according to the CPB). While this sluggish activity was expected, foreign trade was much less dynamic than forecast: exports fell back (-2.5% after +3.2%), in particular in Asia, and imports levelled off (-0.1% after +2.1%).

Activity slowed down in the advanced economies

In Q1 2014, activity slowed down in the advanced economies (+0.3% after +0.5%), more sharply than forecast in Conjoncture in France in March 2014 (+0.5%). In the United States, it contracted under the effect of poor weather conditions and unexpectedly weak investment (-0.2% after +0.7%). In Japan, activity accelerated temporarily, boosted by pre-tax hike rush demand before the rise in VAT on 1st April.

The Eurozone maintained some impetus

In Q1 2014, the slow economic upturn was confirmed in the Eurozone (+0.2% after +0.3%). Activity accelerated in Germany, notably due to the mild winter (+0.8% after +0.4%), and in Spain (+0.4% after +0.2%). It remained sluggish in the rest of the Eurozone, however, notably in France (0.0%) and Italy (-0.1%).

In France, domestic demand excluding inventory held growth back

Activity stagnated in France in Q1 2014, when a slight progression (+0.1%) had been anticipated in Conjoncture in France in March. Foreign trade made a negative contribution to growth (-0.2 points), with the slowdown in exports (+0.3% after +1.6%). Domestic demand excluding inventory fell markedly (contribution of -0.4 points). Consumption fell (-0.5%), in particular in manufactured products (-0.7%) after growing strongly in Q4 2013 (+0.9%). In addition to this, total investment fell sharply (-0.9%), particularly in construction (-1.8%). It should be stressed, however, that the change in base has resulted in a revision of the quarterly profile of this type of investment which now shows a clear downturn at the end of 2013 (see Focus, "The quarterly accounts switch to the 2010 base").

Despite a physical market whith there is little tension, oil prices remain high

Since the beginning of 2014, the price of Brent has stood at a high level of around $108 (€79.4) on average. This high level is no doubt partly due to geopolitical tensions which remain high, although those on the physical market are weak: demand is rising with the world upturn, but at a moderate rate, and oil supply is also increasing, driven by growth in production in North America. Through to the end of the year, tensions should remain low on the physical market: demand should progress slightly, held back by the relative weakness of the emerging economies, while supply should grow as US output increases and certain OPEC countries (Libya, Saudi Arabia) are set to increase their production levels. All in all, as the rises in supply and demand are relatively similar, the price per barrel of Brent is likely to be stable through to the end of the year, set by convention close to the latest observed price ($108).

Activity in the emerging economies set to remain at a slower rate

After being shaken last spring, the currencies of the countries with high current deficits (Argentina, Brazil, Indonesia, Turkey), and also the Russian Ruble, fell again at the beginning of 2014, linked with the winding down of quantitative easing in the US. To deal with this, their central banks continued to tighten their monetary policies. The business tendency surveys, which had shown an improvement in summer 2013, have been on a downward trend since November 2013 and were still at low levels in May 2014. Although past depreciations should continue to favour the price competitiveness of these economies, activity should remain at a slower level. Consequently, their imports are likely to progress at a distinctly weaker rate than prior to the crisis (about +1.6% per quarter, against +2.2% on average between 2000 and 2008).

The advanced economies set to return to a relatively dynamic growth rate

In the advanced economies, the business tendency surveys showed a clear upturn in summer 2013 and remained at quite a high level in May 2014 (see Graph 1). Activity is likely to remain relatively dynamic through to the end of the year: +0.4% in Q2, then +0.5% per quarter in H2. The outlook is more singular in Japan where activity is set to contract in Q2, due to the rise in VAT. Conversely, in the United States, activity should rebound significantly in Q2 by a catch-up effect: purchases that were postponed on account of the bad weather conditions at the start of the year are likely to boost consumption and investment. In H2, activity should grow more moderately. In the UK, the upturn is set to continue at a strong rate, although domestic demand should slow down slightly in H2 as the real-estate market becomes more reasonable.

Monetary policy at the crossroads in the advanced economies

Against the backdrop of an improving economy, the question of monetary policy strategy is of acute importance on both sides of the Atlantic, although in different ways. In the US and in the UK, the central banks have pinned their credibility on maintaining an accommodating monetary policy with low rates over the "long" term, despite the return to growth picking up speed. For the moment, the Federal Reserve, faced with a robust upturn and sustained performance of the labour market, is pursuing its strategy of winding down its quantitative easing programme by reducing the amount of its monthly securities purchases. The Bank of England has maintained its interest rates and the size of its balance sheet until now.

The ECB announced unconventional measures at the beginning of June

The ECB, meanwhile, is faced with weak inflation, a continuing contraction in lending to the private sector and the high level of the Euro which is weighing down on the competitiveness of the Monetary Union.

The ECB lowered its key interest rates in June and announced further unconventional policy measures: it proposes to supply liquidity to those banks that increase their lending to SMEs and households (excluding real-estate loans) and declares that it is ready to invest in securities backed by loans to businesses. The weakness of this market is partly due to demand factors (non-financial private agents are still cutting back their debts), but also due to the poor transmission of the ECB’s accommodating monetary policy.

Growth set to remain moderate in the Eurozone

After showing an improvement in H2 2013, Eurozone business tendency surveys have levelled out at close to their long-term average, a sign that growth is likely to remain moderate (+0.3% per quarter) through to the end of 2014.

European households likely to reduce their precautionary savings slightly

In the Eurozone, purchasing power is likely to increase weakly (+0.2% per quarter), due to the slower fall in employment and more moderate tax hikes, in particular in Italy. Through to the end of the year, prospects in terms of activity and employment should improve and households reduce their precautionary savings. Consumption is therefore likely to accelerate slightly (+0.3% per quarter) and the saving ratio fall a little more moderately than previously, from 13.0% in Q1 2014 to 12.8% at the end of 2014.

Corporate investment should still be dynamic in the Eurozone

The growth in activity and the need to renew production capacities after a marked phase of adjustment should continue to support the upturn in investment in equipment, which is likely to progress by 6.4% on average in 2014. In construction, after a temporary backlash in the spring after the mild winter which had boosted the sector in Germany, activity should level out in H2 2014 after falling for five years. This improvement hides some widely varying trends within the Eurozone: construction is set to buoy up growth considerably in Germany, while it is likely to hold it back in France, Spain and Italy (see Graph 2).

World trade likely to grow again, but the upturn to be moderate through to end 2014

In Q1 2014, world trade contracted unexpectedly (-0.8% after +1.5%), under the effect of the cold spell on the Chinese and US economies. World trade should progress by 1.3% in Q2 2014, with the upturn in trade in the emerging countries, notably in Asia. It should then slow down slightly in H2 to +1.2% per quarter, as the improvement in trade in the Eurozone is likely to be timid.

The upturn in the advanced economies should buoy up French exports

In Q1 2014, French exports slowed down sharply (+0.3% after +1.6%). The dynamism of the imports of France’s trading partners was less than expected and the demand for French products progressed weakly, especially that from non-European countries. Through to the end of the year, foreign demand for French products is likely to be buoyed up by the upturn in the advanced economies and increase in line with world trade (+1.2% then +1.0% per quarter). The growth in French exports should be more modest, however (+0.6% on average per quarter), being held back by the downward trend in market share and the past rise in the value of the Euro.

The business climate has not progressed for nine months now in France

After a marked rebound in all sectors in summer 2013, the business climate in France has been almost stable for nine months (at 94 in May against 95 last September) and is still below its long-term average (see Graph 3). In industry and commerce, the business climate remains close to its long-term level. Conversely, the composite indicator remains at a level well below its average in building (at 94 in May) and it is even falling in services where it stands at a low level (90 in May 2014 against 95 in November 2013).

Manufacturing production to increase in Q2 2014, then slow down

In manufacturing industry, production grew slightly in April (+0.3%). In INSEE’s May business tendency survey, the responses of entrepreneurs remained relatively optimistic as regards their past activity. The balance on production prospects, however, showed a marked fall. Manufacturing production should therefore progress in Q2 2014 (+0.4%), and then slow down again in H2 (+0.1% per quarter), in line with the weak growth in demand and an increasing penetration rate.

More positive factors for energy production

With the mild winter, energy production fell back significantly in Q1 (-1.4%). It should rebound by a backlash effect in Q2 (+2.1%) and remain dynamic in Q3 (+2.1%), notably if there is a return to normal in heating expenditure. After a sharp fall in Q1 (-1.5%), activity in construction should continue to fall in the spring (-0.7%) and summer (-0.6%) and then tend to level out at the end of the year. The fall in the number of housing starts, at their lowest level in 15 years, does seem to be easing and the number of building permits seems to have stopped falling. In addition to this, the public works sector is progressing again, after stalling in Q1 2014 on account of the municipal election cycle. All in all, the French economy is likely to grow at a moderate rate through to the end of the year (+0.3% per quarter).

Growth should come to +0.7% in 2014, after +0.4% in 2012 and 2013

As an annual average in 2014, GDP should progress by 0.7%, representing a slight acceleration after two years of very modest growth: +0.4% in 2012 and 2013 (corrected for the number of business days1). The acceleration in activity should be driven in particular by manufacturing industry (+1.2%, after -0.6% in 2013 and -2.1% in 2012).  In contrast, construction is likely to fall for the third consecutive year (-2.6%, after -1.2% in 2013 and -1.7% in 2012).

Market-sector employment should be stable to the end of 2014

Employment in the non-agricultural market sectors fell in Q1 2014 (-22,000 jobs), hit by the drop in temporary employment. Through to the end of the year, the expected rise in activity is likely to be too modest for employment to show an improvement; it is likely to level out, however, buoyed by the increase in the growth in jobs that the tax credit for competitiveness and employment (CICE) should give rise to.

Total employment should progress, driven by subsidised jobs

In 2014, non-market sector employment is likely to rise in both H1 (+22,000) and H2 (+38,000). The number of beneficiaries of assisted contracts should progress by 16,000 in H1, essentially driven by the ramp-up of the "emplois d’avenir". It should increase slightly more in H2: in addition to the "emplois d’avenir" that continue to be created, there will also be those of the new single "CUI" contracts. Due to this dynamism of assisted employment, total employment should progress by 54,000 jobs in 2014, after growing by 55,000 in 2013.

Unemployment to rise slightly through to the end of 2014

In Q1 2014, the unemployment rate levelled out at 10.1% of the active population in France on average (9.7% in Metropolitan France). In Q2, the unemployment rate should increase again slightly, to 10.2% (9.8% in Metropolitan France) and then, with the slight rise expected in total employment, it should level out at this level in H2.

Inflation should remain weak to the end of 2014

In May 2014, consumer prices were up 0.7% year-on-year. Inflation has remained contained at below +1.0% since last summer and is likely to remain at this very moderate rate through to the end of the year. At the end of 2014, year-on-year consumer prices should stand at +0.7%. Looking beyond the ups and downs from one month to the next, core inflation should fall to +0.2% in December 2014, notably due to the slowdown in telecommunication prices. This moderation is all the more notable given the rise in VAT rates on 1st January 2014; the effect of that rise seems to have been partly absorbed by corporate margins which have been increased by the effect of the tax credit for competitiveness and employment (CICE). Headline inflation, on the other hand, should be up slightly, due to the acceleration in food and energy prices. On the assumption of a Brent oil price stable at €79.4 ($108), the year on year change in energy prices should increase to +1.4% in December 2014 (after +1.1% in May), notably due to the rise in electricity prices.

Growth in real wages set to remain sustained

The mean wage per head would appear to have accelerated slightly in Q1 2014 (+0.6% after +0.4%), probably due to temporary factors, as shown by the lesser progression in the basic monthly wage (+0.3% after +0.4%). The average wage per head should slow down by a backlash effect in Q2 (+0.3%). On average in 2014, real wages should accelerate slightly (+1.0% after +0.8% in 2013).

Purchasing power set for a return to growth

After a marked fall in 2012 (-0.9%) linked with the increase in the tax burden, household purchasing power stabilised in 2013, mainly due to the fall in inflation (+0.6% after +1.4% in 2012). In 2014, the purchasing power of household gross disposable income should accelerate again (+0.7%), notably thanks to less dynamic taxes and contributions (+2.5% after +4.2% in 2013, see Graph 4 ). Social benefits should slow down (+2.4% after +2.8%), under the effect of the postponement of the increase in general pensions (from 1st April to 1st October) and then the pensions freeze. This should be more than offset by the slight acceleration in earned income (+1.4% after +1.0%). The quarterly profile of disposable income is likely to be marked by that in tax, with ups and downs as new measures come into force: while earned income should progress at a globally stabilised rate throughout the year, taxes, after the rises at the end of 2013, should fall back symmetrically in Q1, before rebounding in H2.

The quarterly profile of consumption is likely to show ups and downs due to one-off factors

In Q1 2014, household consumption decreased (-0.5%). More particularly, spending on automobiles fell, after being boosted at the end of 2013 as people brought their purchases forward before the tighter terms of the "malus" (carbon emission tax) came into force on 1st January 2014. Also, the fall in energy expenditure was sharper than in Q4 2013, due to temperatures that were well above the seasonal norms. In Q2, consumption of manufactured products should increase (+0.6%), notably of automobiles. With the mild spring, energy consumption should rebound slightly in Q2 (+1.2%) and then accelerate in Q3 (+1.9%). In H2 2014, household consumption should increase by 0.4% then 0.3%, in line with the average progression in their purchasing power, making an increase of +0.3% on average in 2014, as in 2013.

Despite the quarterly ups and downs, the savings ratio is forecast to be stable

In Q1 2014, thanks to an upturn in purchasing power, the savings ratio would appear to have rebounded by 1.4 points to 16.1%, the highest level since spring 2011. Given the expected profile of the purchasing power of income, the savings ratio should fall progressively over the rest of 2014, to stand at 14.7% in Q4, the same level as one year earlier (see Graph 5). On an annual average, it should progress by 0.3 points to 15.4%.

Public expenditure should slow down in 2014

Public consumption should progress by 0.3% per quarter through to the end of 2014; the rise on average over the year should be 1.6%, slower than in 2013 (+1.9%). Public investment fell back in Q1, after the peak in public works at the end of 2013 linked to the electoral cycle. It should stabilise through to the end of 2014.

The fall in household investment is likely to be accentuated

In Q1 2014, household investment, especially in new housing, continued to fall for the ninth consecutive quarter (-2.6% after -2.2%). This fall should ease moderately in the course of the year and level out at the end of 2014. Given the overhang in Q1 2014, the fall in household investment should be accentuated in 2014 (-6.7% after -3.1% in 2013), the sharpest fall since 2009.

Corporate investment set to progress slightly

Corporate investment contracted again in Q1 2014 (-0.5% after +0.8%). Expenditures in services held up, but that in construction fell back (-1.1%). Investment in manufactured products also fell (-0.9%), by a backlash effect after companies brought forward their purchases of heavy goods vehicles before the entry into force of new anti-pollution standards on 1st January 2014. Through to the end of 2014, corporate investment should progress at a moderate rate (+0.2% on average per quarter), against a backdrop of weak demand and despite the favourable effects of the CICE and the improvement in financing conditions. Over the whole of 2014, corporate investment expenditure should rebound moderately (+0.7% after -0.6% in 2013), in the wake of activity.

France and the Eurozone to grow at the same rate

Through to the end of 2014, quarterly growth should be the same in France as the average for the Eurozone (+0.3% per quarter). The drivers are likely to differ, however, with more consumption in France and more dynamic investment in the rest of the Eurozone.

Effect of economic policies in the Eurozone and France

The main uncertainty in this scenario is the trajectory of inflation. In the scenario taken here, the return of growth, improving labour market and monetary policy measures and announcements should allow the Euro and inflation in the Eurozone to stabilise. It is possible, however, that the factors that explain the faster-than-expected fall in recent months might continue to weigh on inflation. Conversely, inflation could grow again, notably if the measures announced by the ECB succeed in bringing the Euro down.

In addition, the scenario for activity in France will depend on the response of businesses to the set of economic policy measures taken and announced by the government. Depending on their perception of them, their behaviour in terms of investment and inventory might be more or less dynamic.

Savings behaviour of European households

There are also greater uncertainties than usual around the trade-off between household consumption and savings. In the scenario taken for this Conjoncture in France, the fall observed recently in the household savings ratios of France’s main trading partners continues but at a lesser rate. However, European households might choose to profit more in the future from the improvement in their income to build up their savings again, and thus reduce their debt. Conversely, the fall in the savings ratio might not ease, especially in the short term, thereby having a positive impact on demand for French products. The savings behaviour of French households is also a subject of uncertainty and could vary in either direction.

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