France keeps up the paceConjoncture in France - December 2017
An analysis of the current situation and short-term outlook of the French economy and France’s international environment, comprising two analysis reports, twenty-one thematic data sheets, and a number of special focuses on topical matters. For this December 2017 issue, the forecasting period runs to Q2 2018.
Corporate margin rate should stabilise below pre-crisis level
The margin rate of non-financial corporations is a schematic measurement of the proportion of capital in the distribution of value added. Generally stable between 1987 and 2007 at around 32.7%, it slumped during the crisis of 2009 and again in 2012 and 2013. It has picked up again in the meantime, but without quite making up for the drop caused by the crisis. Since early 2016 the rate has hovered at around 31.6%, one percentage point below its pre-crisis level. This decrease can be solely attributed to market services companies. Indeed, the margin rate in industry hit a 30-year high in 2016.
Several factors can explain this misalignment. First of all, the margin rate contains a significant cyclical component, which increases in line with payroll rigidity and the scale of activity shocks. Depending on the degree of substitutability between production factors in the overall production apparatus, the margin rate may be affected by the relative cost of production factors, and thus by fluctuations in commodity prices, taxes on labour and capital, interest rates (which influence the cost of capital) and the bargaining power of employees. Finally, the literature demonstrates the role played by the degree of competition: the greater the market power of a firm, the higher its equilibrium margin rate will be.
By breaking down the accounting elements and modelling the margin rate for each branch at a fine level, it is possible to quantify the contribution of these factors to variations in the margin rates of French businesses and determine whether or not this is a long-term situation, making the distinction between industry and services.
In industry, the margin rate currently stands at an exceptionally high level thanks to a reduction in levies on businesses and the improved terms of trade resulting from the recent fall in oil prices. However, the cyclical component, which was previously strongly negative, has simply returned to its average level in 2017.
For market services, the decline has a fairly strong cyclical component because the rebound in activity in services came later than it did for industry. Nevertheless, there are also more structural factors at work: in the trade and information-communication branches, the substantial decrease seems to be largely a result of the intensity of competition. This has led to a fall in the price of value added in these branches and a dilution of market share, calculated from individual data. In services to businesses, virtually all of the decline seen over the past 17 years can be attributed to the movement towards specialisation in low capital-intensive activities: heavily capital-intensive activities such as equipment hire have shrunk, while a large increase has been observed in administrative support services, which are very labour-intensive and have a very low margin rate. This drop in the margin rate of services is not specific to France: in Germany, the rate declined much more sharply over the same period.
All sectors combined, one-third of the decrease in the margin rate (in relation to the levels seen in the 1990s) can be attributed to short-term factors. In services, the negative effects of the cycle have been partially offset by the positive effects of falling labour costs and the improved terms of trade. The remainder appears to stem from long-term factors linked to a mutation in the structure of French activity towards branches which are less capital-intensive, along with the higher degree of competition in certain service sectors. The margin rate could therefore see a slight increase as activity continues to grow, but without necessarily returning to its pre-crisis level.