Investment is buoyant, consumption more lacklustre Conjoncture in France - March 2018

Julien Pouget - Frédéric Tallet - Mikael Beatriz - Flore Cornuet

French economic activity remained buoyant in Q4 2017 (+0,6% after +0,5%), driven notably by strong private investment and high exports. Activity rose by 2% in 2017, at its highest since 2011.

In an international environment that remains favourable, the slight decline in the business climate – which remains at a high level – observed at the start of 2018 suggests that over the forecasting period (mid-2018), activity is likely to progress at a less sustained pace (+0,4% in Q1 and Q2).

Conjoncture in France- March 2018

General Outlook: Investment is buoyant, consumption more lacklustre

French economic activity remained buoyant in Q4 2017 (+0,6% after +0,5%), driven notably by strong private investment and high exports. Activity rose by 2% in 2017, at its highest since 2011.

In an international environment that remains favourable, the slight decline in the business climate – which remains at a high level – observed at the start of 2018 suggests that over the forecasting period (mid-2018), activity is likely to progress at a less sustained pace (+0,4% in Q1 and Q2).

Market employment is set to progress again solidly; further its sharp fall in Q4 2017, the unemployment rate is likely to stay unchanged in H1 2018. Households consumption is likely to keep a moderate pace while their housing investment should slow down. But corporate investment should remain buoyant as a response to tensions in production capacity. Finally, foreign trade should no longer weigh down on growth overhang through to mid-2018.

Conjoncture in France

Paru le :20/03/2018


2017 marked the return of steady, regular growth to France (+2.0% on an annual average basis), its highest since 2011. This progression went hand-in-hand with 270,000 net job creations, bringing the unemployment rate down by more than one percentage point. These results were driven in particular by a return to more dynamic investment, while household consumption proved to be less dynamic than in 2016. The end of the year was also marked by the expected rebound in aeronautics exports.

This recovery of the French economy comes in an international environment that remains strong in early 2018. With the implementation of tax reform, among other factors, the US economy is likely to continue its expansion, with its imports giving impetus to world trade. The scheduled tightening of the Fed’s monetary policy does not seem to be affecting this dynamism. The risk of overheating cannot be ruled out, however, and stock market volatility is on an upward trend. The economic outlook should also remain positive in the emerging countries, despite a slight slowdown in Chinese activity.

With growth of 2.5% in 2017, the outlook in the Eurozone seems to have caught up with the United States. The business climate remains very positive there, although it has slipped back slightly in early 2018 and political uncertainties remain in Spain and Italy. Eurozone economic activity should therefore progress at a pace of 0.5% per quarter through to mid-2018, driven notably by domestic demand: dynamic earned income combined with contained inflation should drive household purchasing power and therefore consumption, while corporate investment is unlikely to weaken in a context of growing tensions in production capacity. Exports, however, are likely to be hit slightly by the recent rise in the euro.

In France, the business climate reached a ten-year high in December 2017. The slight decline observed at the start of 2018 (while remaining at a high level) suggests that over the forecasting period, activity is likely to progress at a less sustained pace (+0.4% in Q1 and Q2; annual growth overhang of +1.6% by mid-2018). The progression in GDP should be driven in particular by corporate investment, as businesses seek to boost their production capacities. Household consumption is likely to remain at a moderate pace: earned income should accelerate but purchasing power is likely to be at a temporary standstill in Q1, mainly due to the upturn in inflation linked to the rise in indirect taxation. Households are likely to cut back their savings ratio, however, pending a rebound in their purchasing power in the following quarters. Their investment expenditure, meanwhile, should slow down in H1, as suggested by the stabilisation in sales of new houses observed in the last few months. Finally, foreign trade should no longer weigh down on growth through to mid-2018.

Market-sector job creations are likely to accelerate a little over H1 2018 (+129,000), essentially in the service sector, while non-market employment is expected to fall back with the decrease in the number of subsidised jobs. Total employment should therefore progress by 113,000 over the first half of the year. After decreasing sharply in Q4 2017, the unemployment rate should remain unchanged through to mid-2018 at 8.9%, down 0.5 points year on year.

In the short term, this scenario is likely to be affected by the political uncertainties that remain on both sides of the Atlantic. The possible return of inflationary tensions could thus lead to greater uncertainties surrounding developments in US monetary policy and the way in which it is received by the markets. In France, the consumption behaviour of households also remains dependent on their view of the likely trends in their purchasing power.

General outlook

World activity remained dynamic, with the emerging economies and Eurozone leading the way

2017 saw the strongest growth in world trade since 2011

After 2.0% growth in 2016, world trade progressed by 5.2% in 2017, a pace not seen since 2011. This dynamic international trade reflects strong growth in both emerging and advanced economies. While the imports of the emerging economies were moderate in Q4 2017 (+0.8%), those of the advanced economies accelerated (+1.9%). Over 2017 as a whole, growth in the imports of the emerging economies was strong (+5.4%), as it was in the advanced economies (+4.9%).

In 2017, the main emerging countries saw an acceleration in their economic activity (India, Turkey, the countries of Central and Eastern Europe) or emerged from recession (Russia, Brazil). Chinese growth stood at +6.9% for 2017 and remained sustained, despite a very progressive slowdown (+1.6% in Q4 after +1.7% in Q3).

In the Eurozone as in the United States, activity is still ticking over at a fast pace, but slowed down slightly at the end of the year

In the United States, activity accelerated over 2017 as a whole in relation to 2016 (+2.3% after +1.5%), despite slowing down slightly at the end of the year (+0.6% after +0.8% in Q3). In the Eurozone, the annual acceleration in GDP (+2.5% after +1.8% in 2016) was achieved despite a slight deceleration in Q4 (+0.6% after +0.7%). Growth in the main Eurozone countries, however, remained sustained at the end of the year (+0.6% in Germany, +0.7% in Spain and +0.3% in Italy). In December, the business climate indicators reached peaks comparable to those just before the European sovereign debt crisis. Morale among business leaders stopped progressing at the beginning of 2018, however, while remaining at a high level.

Japan also had a relatively good 2017, with growth climbing to +1.7%, after +0.9% in 2016, benefiting from world trade and the rebound in domestic demand. Among the major advanced economies, only the UK did not see an acceleration in activity, hit by uncertainties surrounding the Brexit arrangements and by the effects of the past depreciation of Sterling on purchasing power.

French activity benefits from the recovery in investment

French economic activity followed this positive worldwide economic trend: it grew by 2.0% in 2017, after +1.1% in 2016, returning to a pace close to those observed in 2010 and 2011. In Q4 2017, it progressed by 0.6% (after +0.5% in Q3) as forecast in Conjoncture in France in December, driven notably by strong corporate investment (+1.6% after +1.1%) and investment by households (+0.6% after +0.9%). This dynamism was only partly attenuated by the slowdown in consumption by households (+0.2% after +0.6%) and by general government (+0.3% after +0.5%). Driven by large aircraft deliveries, the contribution of foreign trade to growth was clearly positive (+0.6 points). Buoyant exports (+2.4% after +1.0%) went hand in hand with significant destocking of manufactured goods.

On the supply side, the manufacturing sector stood out by a marked acceleration in its production (+1.5% in Q4 2017 after +0.8%), with production in market services excluding trade accelerating more moderately (+1.0% after +0.7%).

Monetary policies are being normalised at different paces

Monetary normalisation more advanced across the Atlantic

US inflation has picked up (+2.1% year on year at the end of 2017) and the labour market in the States is looking good with an unemployment rate at 4.1%. Against this backdrop, the Federal Reserve (Fed) has announced that it will be continuing its successive base rate hikes. Three to four quarter-point hikes are therefore expected in 2018, starting from a base rate of 1.5% at the start of the year. Normalisation of US monetary policy also implies reducing the Fed’s balance sheet, at a rate of $20 billion a month at the start of the year and by as much as $50 billion a month at the end of 2018.

If inflation should prove to be stronger than expected among operators and go well above the annual 2% target, financial markets could react negatively via increasing volatility in asset prices, as shown by the stock market correction at the beginning of February.

The ECB, meanwhile, is keeping its base rates at rock bottom levels (refinancing rate of 0.0% since March 2016) and continuing its asset purchases at least until September 2018, although at a rate reduced by half in 2018 (€30 billion a month) as against 2017.

The euro up and long-term rates rising

After a break in Q3 2017, the euro continued its rise against the dollar, to $1.25 in January, before falling back slightly in February. Consequently, the real effective exchange rate for France should rise in Q1 2018. The recent announcements of public investments in the US, the stock market correction at the beginning of February and expected rises in US base rates have driven a rise in long-term rates. Following these world factors, the French 10-year sovereign rate has risen to around 1.0%, against a low of 0.5% in December 2017, compared to a rate close to 3.0% for the United States. The gap with Germany has continued narrowing, however, to just 0.2 points in February.

US production should absorb increased worldwide demand for oil

Over 2017 as a whole, demand for oil slightly exceeded supply. The latter remained contained thanks notably to the output limitations in the countries that signed the OPEC agreement drawn up at the end of 2016. This agreement has contributed to a rise in Brent prices to $70 at the end of January 2018 (against about $50 at the end of 2016). However, plentiful US production, the shale component of which is accelerating sharply, has weighed down on Brent prices, bringing them down to around $65 in February 2018. It also led to a return to equilibrium on the world oil market at the end of 2017 and should be able to meet the demand which is likely to continue growing at a sustained rate in H1.2018.

A positive outlook for the emerging economies and the US fiscal stimulus

The emerging countries are benefiting from a brighter worldwide outlook

The emerging economies are currently benefiting from a number of positive factors: good industrial prospects (in Brazil, India and Turkey), rising household purchasing power and oil prices (for Russia in particular) and the dynamic imports of their trading partners (the Eurozone for the countries of Central and Eastern Europe, for example). These drivers should enable them to maintain high growth rates or even allow an acceleration in activity in most of these countries.

In China, imports to pick up despite the slight slowdown in domestic demand

After stalling in Q4 2017, Chinese imports should pick up in H1 2018 (+2.0% per quarter), benefiting from the past depreciation in the Yuan. Exports are unlikely to suffer, however (about +1.5% per quarter, after +3.6% in 2017). Finally, in line with the trend in domestic demand, Chinese activity should only barely slow down (+1.5% per quarter).

Investment to accelerate in the United States

The tax reform passed at the end of 2017 by the US Congress should begin to have its effects on household income and corporate profits from H1 2018. Household consumption is therefore likely to remain brisk (+0.6% in Q1 then +0.7% in, Q2), driven by their purchasing power (+0.9% per quarter) which is benefiting from dynamic employment. Corporate investment is set to accelerate significantly (+1.0% then +2.0%) with the prospect of the introduction of the additional depreciation system in Q2 2018. US economic activity should therefore accelerate slightly (+0.6% then +0.8%).

World trade set to remain dynamic

In Q4 2017, world trade progressed by 1.4%, with a particular acceleration in US imports. In H1 2018, growth in world trade is likely to ease a little (+1.3% then +1.2% in Q2) while remaining dynamic.

Eurozone: a slight slowdown in a fast pace

European households to benefit from dynamic earned income

The brighter economic situation in the Eurozone should allow a continuing rise in employment in 2018 (+0.4% per quarter) and a fall in the unemployment rate to 8.5% in the summer (–0.1 then –0.2 points). In a context of continuing recruitment difficulties, especially in Germany, wages should also be dynamic at the start of the year, growing by 0.7% per quarter, so a little ahead of inflation. The year-on-year increase in prices continues to be contained (+1.5% in mid-2018 and +0.9% for core inflation) and purchasing power gains should continue to be robust in the Eurozone.

Domestic demand to remain solid

In H1 2018, household consumption should therefore follow the same trend as at the end of 2017 (+0.5% per quarter) and it is likely to be the same for general government consumption (+0.3% then +0.2% per quarter). With the latest figures on building permits showing a fall from their recent high levels, investment in construction is likely to slow down slightly. Equipment investment is likely to remain buoyant in Q1 2018 and then slip back in Q2.

Activity to remain sustained, although decelerating in relation to 2017

All in all, economic activity should maintain a brisk pace (+0.5% per quarter), with Germany and Spain once again progressing a little more quickly than France and Italy. This rate is slightly below that observed in 2017 (+0.6% to +0.7% per quarter), but higher than those in previous years.

Short-term fluctuations aside, foreign trade should no longer weigh down on French growth

Aeronautics and shipbuilding deliveries drive French exports

In Q4 2017, French exports accelerated significantly (+2.4% after +1.0% in Q3) due to strong world demand for French products, and in particular exceptionally high aeronautics deliveries, making up for previous quarters. In addition to strong growth in sales of manufactured goods, expenditure by foreign tourists in France, which contributes to exports of services, remained solid at the end of the year. In H1, the figures for exports (+1.0% in Q1 then +0.5% in Q2) should once again be driven by the aeronautics and shipbuilding sector, with the delivery of a cruise ship in Q1 in particular.

Foreign trade should no longer weigh down on growth through to mid-2018

Unlike exports, imports slowed down at the end of 2017 (+0.3% after +2.2%), mainly in reaction to the exceptional purchases over the summer, notably in chemicals and aeronautics. Against a backdrop of a slight slowdown in domestic demand and its import content, in H1 the latter should return to a rate that is closer to that observed in recent years (+1.1% then +1.2% per quarter). All in all, foreign trade should make a positive contribution of +0.2 points to the growth overhang in mid-2018, after weighing down on growth for several years (by –0.3 points in 2017).

French activity should slow slightly while remaining a sustained pace

The business climate declined slightly at the beginning of 2018 after reaching a 10-year high at the end of 2017

In all sectors, the business tendency surveys report that a high level of optimism was reached at the end of 2017. At the beginning of 2018, certain business climate indicators stopped progressing, notably in industry and the retail trade, while others fell back, such as in services, building and the wholesale trade, although remaining in all cases at much higher levels than their long-term averages. The business climate in France thus stood at 109 in February 2018, down 3 points on last December.

Production growth rates to ease slightly from their 2017 levels

Manufacturing output is likely to slow in early 2018 (0.2% in Q1 then 0.6%) after a particularly strong end to 2017 (+1.5% in Q4). Production in market services excluding trade (+0.5% per quarter) and in trade (+0.3% in Q1 then +0.6% in Q2) should also be a little less dynamic over the first half of the year. Construction remained buoyant in Q1 (+0.8%) but should slow in Q2 (+0.6%) due to the fall in investment in building, while investment in civil engineering should recover after falling for two quarters. After a rebound in 2017 back to a production level in line with the long-term trend, agricultural output should be stable in early 2018.

All in all, GDP is set to progress over H1 2018 at a slightly less rapid pace than in 2017 (+0.4% per quarter). At the end of June, the growth overhang for 2018 should be +1.6%.

Market employment is set to progress again solidly

The positive outlook is driving market employment and notably temporary employment

In 2017, dynamic activity boosted market payroll employment by 133,000 jobs in H1, then by 124,000 in H2. At the beginning of 2018, workforce prospects remain very positive in the business tendency surveys and the employment climate has been stable at 109 since December. Market payroll employment is therefore expected to accelerate a little in H1 (+129,000). Job creations in market services should remain robust (+113,000), making up the major part of the rise. Of these jobs, temporary employment should progress again in H1 (+20,000). Industry should create jobs again (net creations of +6,000, as in H2 2017). Buoyant economic activity aside, the measures to reduce labour costs are unlikely to continue increasing the employment intensity of growth, as the positive effects of the Tax Credit for Encouraging Competitiveness and Jobs (CICE) and the Responsibility and Solidarity Pact (PRS) are offset by the negative effects of the termination of the hiring premium for SMEs.

Total employment to progress less quickly than market employment due to the fall in subsidised employment

Non-market payroll employment fell in H2 2017 (–13,000) with the reduction in the number of beneficiaries of subsidised jobs. This trend should continue through H1 2018 (–21,000). Total employment should therefore progress by 113,000 jobs in H1, after +114,000 in H2 2017.

The unemployment rate to fall by 0.5 points year on year

The unemployment rate fell sharply in 2017 to 8.9% at the end of the year, against 10.0% one year earlier. Further to its sharp fall in Q4 2017, the extent of which greatly exceeded expectations based on trends in employment and the active population, the unemployment rate is likely to remain unchanged in H1 2018 at 8.9% of the active population, down 0.5 points year on year.

Purchasing power is expected to stall temporarily at the start of the year, notably due to the upturn in inflation, before rebounding in the spring

Core inflation to remain moderate but headline inflation to rise

After reaching +1.2% at the end of 2017, inflation should continue to rise to +1.6% in June 2018, driven by the acceleration in the prices of energy products and tobacco. These factors are not taken into account in the calculation of core inflation, however, which should rise only moderately from +0.6% at the end of 2017 to +0.8% in June 2018. Dynamic wages are likely to push prices upwards, although this effect should be attenuated by the drop in social housing rents.

Nominal wages to remain dynamic

Nominal wages accelerated significantly in 2017 in the market sector (+2.0% after +1.2% in 2016). In 2018, as recruitment difficulties continue, they are likely to remain dynamic (+1.2% in H1), sustained also by a larger increase in the minimum wage on 1st January than in the last two years. The expected upswing in inflation should slow down real wages slightly, however.

Earned income to boost purchasing power

The acceleration in the earned income of households, driven by positive trends in employment and wages, was comparable in 2017 to that in consumer prices: household purchasing power would therefore appear to have progressed strongly in 2017 (+1.7%), at a similar rate to that in 2016 (+1.8%). It is likely to slip back in Q1, notably due to indirect taxation, before rebounding in the spring. The growth carry-over of purchasing power should reach +0.8% in mid-2018. Taking account of the calendar for implementation of tax and social contribution measures (direct and indirect taxation), their impact on purchasing power should be more positive on a year-on-year basis at the end of the year than on an annual average basis.

Household consumption is likely to progress at a moderate rate

Despite sustained gains in purchasing power in 2017, household consumption progressed only moderately (+1.3% after +2.1% in 2016). While low energy consumption weighed down on the overall figure, purchases of other goods and services were barely more dynamic than in 2016. In February, household confidence deteriorated, returning to its long-term average, but the balance on readiness to make large purchases remained almost stable at a high level. In H1 2018, household consumption should therefore remain lacklustre (+0.3% in Q1 then +0.4% in Q2). Households are likely to cut their savings ratio temporarily in the face of the passing slowdown in their purchasing power, in anticipation of the improvement expected at the end of the year due to the taxation calendar. This smoothing effect should cause their savings ratio to slip, from 14.3% at the end of 2017 to 13.7% in Q1 2018, before returning to 14.1% in Q2.

Corporate investment is set to progress again strongly, while household investment slows significantly

The corporate investment ratio reaches a peak

Investment by non-financial enterprises accelerated in 2017 (+4.4% after +3.4% in 2016), taking their investment ratios to levels not seen in 40 years (22.4%). After growing briskly at the end of 2017 (+1.6%, after +1.1% in Q3), investment should remain solid (+1.1% in Q1 then +1.2% in Q2) in response to continuing production capacity tensions. Although the confidence levels reported by business leaders are slightly down on the end of 2017, they should benefit from the rise in the rate of the Tax Credit for Encouraging Competitiveness and Jobs (CICE) from 6% to 7% (for the year 2017, paid in 2018) and their margin rate in Q2 2018 should be close to the average level for 2017 (31.8% for non-financial corporations) despite dynamic wages.

Slowdown in household investment, a return to expansion in public investment

After a pronounced acceleration in 2017 and a rate of growth not seen since 1999 (+5.4% after +2.4% in 2016), household investment is likely to slow down significantly in 2018 due to the levelling out of sales of new homes. It should grow by 0.5% in Q1 then by 0.2% in Q2, after +0.6% in Q4 2017. The growth overhang in mid-2018 will only be +1.9%. After falling for five years, public investment should return to growth in 2018, meanwhile (+2.4% growth overhang in mid-year), driven notably by the work on the Greater Paris Express.

Uncertainties: gradual tightening of monetary policies, notably in the US; household consumption behaviour in France

Consequences of the US policy mix

In the United States, the current policy mix of highly expansionary fiscal policy and gradually less accommodating monetary policy could bring growing uncertainties on stock markets. The fear of possible inflationary pressures could increase their volatility, for example.

Political uncertainties in Europe

In Europe, after the negotiations on the formation of the German government, political uncertainties now concern the consequences of the Italian elections, the situation in Catalonia and the arrangements for Brexit.

Consumption and savings behaviour of French households

In France, consumption of households at the beginning of the year is largely dependent on their savings behaviour as they face a temporary slowdown in their purchasing power. The fall in the savings ratio could be greater than expected and consumption therefore more dynamic. Or consumption could be hit by a wait-and-see attitude among households.