What will drive the French growth?
Recapping 2017: numbers and implications
- Annual GDP growth in France saw an upward revision to 2% in 2017, over-shooting the Bank of France’s expectations of 1.7% growth, as the economy grew the fastest in the fourth quarter – driven primarily by investment whose contribution to the GDP at 1% overshadowed consumption for the first time since 2013. The year also recorded the highest GDP growth in the past six years. However, accelerated inflation accompanied the economy at 1.2% YoY, up from 0.2% YoY last year – primarily responsible for the lower household consumption.
- Total investment grew sharply in 2017 at 3.7% after 2.7% in 2016, while consumption slowed down to 1.2% YoY growth. Exports considerably accelerated as well, with 3.5% growth after 1.9% in 2016, but imports progressed at virtually the same pace in 2017 at 4.2% growth. As a consequence, the contribution of trade balance to the GDP rose slightly last year.
- Although exports growth was significant, the economy has not surprised us (yet) on the competitiveness front. France is currently running a large negative trade balance that has widened significantly since 2003. The current account balance has been falling overall although it did pick up slightly towards the end of 2017Q3. FDI exhibits a similar trend. However, in terms of cost competitiveness, France improved its performance in 2017 – the increase in unit labour costs was slower than that of Germany, and the EU average for all four quarters.
- On a positive note, France’s budget deficit fell to 2.6% of the GDP in 2017, respecting the EU 3% target for the first time in a decade, triggered by sharper revenue growth of 4% and expenditure growth of 2.5%. Currently, France along with Spain are the only Eurozone countries under the EU’s excess deficit procedure, and to be given an “all-clear” signal by the EU Commission, France must maintain its deficit under 3% for another year. However, gross debt at 97% of the GDP is at an all-time high.
What lies ahead – our view
- After a significant acceleration in 2017, in our view, economic activity should continue to grow at a similar robust pace in 2018, maintaining its 2% growth – favoured by rising profits and growing inventories. Economic sentiment continues to improve, with most confidence indicators approaching, or even exceeding their pre-crisis levels. Hiring appetite continues to rise as well, with strong readings for production surveys in industrial, construction and manufacturing sectors.
- Investment has performed remarkably well this year after several years of contraction, and we expect the effect to carry-on to 2018 – mainly contributed by rising corporate investment thanks to the Macron reforms, thereby incentivising firms to invest. Share of firms producing at maximum capacity at 37% is the highest since 1999. Household investment is likely to be spurred by falling interest rates as well. However, we expect GDP growth to moderate slightly in 2019 at 1.8% as the effects of Euro appreciation would gradually be realised – weakening the demand for French exports and thereby, neutralising the contribution of external balance on the economy’s growth.
- We see inflation at a moderate pace of 1.4% – 1.5% YoY over the next two years, triggered due to higher oil prices. As higher prices eat into purchasing power, household consumption is unlikely to pick up significantly. Rather we expect house savings to rise – in line with the surveys on future savings appetite.
- We also expect reforms to attract a significant FDI this year as they are realised, and the country improves its competitiveness – since prior surveys signalled that the biggest hurdle for business was the overly complicated tax system which has now been completely overhauled.
- Overall, as the economy expands, we see investment becoming a key driver of growth, over-taking consumption after years: we could call this the “Macron effect”.
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