The fortnight s focus. q/q% France: real GDP hard data estimate*

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1 Focus Fr ance# $T ypcap$ $Industr y$ $Categ orie$ $IsWipSource$ $IsWipPending $ $IsWipEmpty$ $compi d$ 2 Economy Focus France N French GDP growth takes a cold snap Wednesday 11 April 218 Bruno Cavalier - Chief Economist bruno.cavalier@oddo-bhf.com +33 () France s economy started 218 on weak conditions regarding manufacturing activity and the consumption of durable goods. The business climate has dipped, but as it had reached exuberant levels last year, it remains relatively favourable overall, a feature of an expansionary phase. The social climate is, however, more strained. Transport disruption can, as experience shows, act as a temporary drag on activity. What is lost is subsequently made up. The reform of the state-owned railway operator (SNCF) is too important a point symbolically, in our view, for the government to capitulate. The fortnight s focus After five quarters of robust growth an unprecedented sequence since 21 the pace of activity braked in Q1 and clouds linked to the social climate are darkening the horizon for Q2. In a note published a few weeks ago, INSEE, France s national statistics bureau, forecast real GDP growth of.4% q-o-q in Q1, compared with.6% per quarter in 217. In its estimate published this morning, Banque de France forecast +.3%. A calibration based on the various business climate surveys portends a fairly modest slowdown in growth (chart lhs). But other signals are much more negative. Manufacturing production contracted over January-February, the consumption of durable goods also weakened, so that a calibration based on hard data raises the risk of quasi-stagnation (chart rhs). A quarter can be exceptionally good or bad depending on temporary factors, without the underlying trend being radically altered. In Q1, the severe weather conditions on the one hand, the implementation of a number of tax hikes on the other, acted as a drag on growth. A correction in the other direction is likely further on in the year. The snag is that Q2 is off to a bad start as activity will be disrupted by transport strikes. To mark their opposition to the reform of the SNCF, France s state-owned railway operator, the rail workers unions have scheduled 36 strike days, incl. 25 working days, spread out over a three-month period. For other reasons, there is also a strike at Air France. Past examples give a vague notion of the impact from these actions. There was a general strike of 22 days (16 working days) in Q4 1995, of 1 days (8 working days) in Q4 27. INSEE has estimated that that the strike of 1995 cost two-tenths of a point of growth and that of 27 one tenth of a point, whilst acknowledging that these are very approximate calculations. In Q2 216, a blocking of refineries that lasted a number of days acted as a drag on activity. Experience shows that what is lost over one quarter is made up subsequently. But for the business climate, household confidence and investor sentiment, this sharp pull-up in growth, even if it proves temporary, is coming at a bad time. France: GDP growth and soft data q/q% France: real GDP soft data estimate* France: GDP growth and hard data q/q% France: real GDP hard data estimate* * fit based on survey data from Banque de France, INSEE and PMI Sources: Thomson Reuters, Oddo BHF Securities Conflict of interests: -1.5 * fit based on industrial output and goods consumption by household ODDO BHF CORPORATES & MARKETS, a division of ODDO BHF SCA, limited sharepartnership - Bank authorised by ACPR. ODDO BHF and/or one of its subsidiaries could be in a conflict of interest situation with one or several of the groups mentioned in this publication. Please refer to the conflict of interests section at the end of this document. Le présent document n'est pas un document contractuel ; il est strictement destiné à l'usage privé du destinataire. Les informations qu'il contient se fondent sur des sources que nous estimons fiables, mais dont nous ne pouvons garantir l'exactitude ni l'exhaustivité. Les opinions exprimées dans le document sont le résultat de notre évaluation à la date de la publication. Elles peuvent donc être révisées à une date ultérieure. This document was printed for Alice PHILIPON on Wednesday, April 11, 218 1:54:17 PM. -1. Page 1/5

2 Wednesday 11 April 218 The fortnight s economic newsflow According to the final estimate of the national accounts for Q4 217, real GDP growth was marginally revised up to +.7% q-o-q. The year average is now 2%. All of the components of demand gathered pace last year, with the exception of consumer spending which slowed from +2.1% in 216 to 1.3%. Even though employment and payroll have firmed up, the rebound in inflation has eroded purchasing power on households disposable income. On average over the year, the savings rate even increased slightly from 14% to 14.2%, reflecting consumer caution in a context marked by high levels of unemployment and public debt. Due to the unexpected increase in tax receipts, the budget deficit fell sharply last year, from 3.4% to 2.6% of GDP. This is the first time since 29 that France has taken its deficit to within the limits authorised by the European Commission. This should result in the lifting of the excessive deficit procedure. That said, the state of public finances remains a concern, on two fronts. First, in terms of flows there remains a marked spiralling in government spending (+2.5% in 217). The spendingto-gdp ratio appears to have, at best, stabilised at 56.5%, one of the highest levels worldwide and nine points above the average in the Eurozone. According to Eurostat, this includes close to 25 points of GDP spending on social insurance (6 points above Germany) and 8 points for healthcare spending (1 point above Germany). Then, in terms of stock, public debt rose again in 217 to end the year at 97% of GDP. In the multi-year stability programme presented on 11 April, the government plans a reduction in the public deficit to 2.3% in 218 and a slight erosion in indebtedness, but in 219 the financing needs are set to rebound by around 1 point of GDP due to a temporary shock, the transformation of CICE, a tax credit, to a permanent reduction in social charges. Rather than falling to 1.4% of GDP the budget deficit will be 2.4%. Besides other economic uncertainties, one of the unknowns weighing on the future trajectory the deficit stems from the reform of the SNCF, for which one of the major problems is its level of debt. In 217, this stood at 46bn, 2% of GDP. What would be the point of cleaning up the governance of the rail operator if is balance sheet is not also cleaned up? To achieve this, one idea that has frequently been mooted is that the debt should, at least partially, be taken on by the state. Such a transfer would be booked as spending and would contribute to the public deficit. In February, industrial production rose sharply (+1.2%) but this was solely due to a surge in energy production (+11.5%) during the period of very low temperatures. This weather effect probably spilled over into March. We find the same impact on goods spending by households, with the energy component gaining 8.9% m-o-m. At the same time, manufacturing production contracted, as did spending on durable goods. After a decline of several months, consumer confidence is stabilising. In March, the stood just at its historic average. Unemployment expectations were stable at a low level. Forthcoming events The central question of the coming days and weeks is industrial action and the progress made in the reform of France s national rail company (Focus-France of 1 March). Both parties have very firm positions for reasons that go far beyond this specific reform. On the one hand, there are trade union elections at the end of the year. On the other, Macron s drive to push through reforms is at stake. Four of the 36 strike days have already taken place. The number of strikers has dipped a little but remains very high among drivers (>75%), which means that traffic is at only 25% of the norm. As a sign that this deterioration in labour relations is being taken seriously by the government, Emmanuel Macron has scheduled two TV interviews on 13 and 15 April. At this stage, the opinion polls show that a majority of French people support this reform, including the end of the special status for rail workers. This is the main incentive for the government to maintain a firm stance. As another consequence of these strikes, the presentation of the draft bill for companies (the so-called PACTE bill) has already been postponed twice, from mid- April to early May, and then the end of May. There are rumours that it will be postponed until after the summer. One of this bill's sections is supposed to involve the terms and conditions under which the French state could pull out of certain companies in which it has controlling interests. On 1 April, the finance minister referred to ADP and Française des Jeux, but the final decision has not been taken. This is a very sensitive subject at a time when trade union propaganda is brandishing the threat of the SNCF's privatisation. More generally, many draft reforms (housing, rail transport, unemployment benefits, companies and institutions) are creating a legislative bottleneck. There is therefore a delay in the parliamentary debate and rollout of the reform agenda. This document was printed for Alice PHILIPON on Wednesday, April 11, 218 1:54:17 PM. Page 2/5

3 Wednesday 11 April 218 Appendix chart: business climate, confidence, households Confidence indicators Current Expansion Recession* Index Mar Feb. Jan PMI manufacturing PMI services (output) PMI composite (output) INSEE manufacturing INSEE services INSEE construction INSEE retail sector INSEE wholesale sector INSEE consumer conf BdF manufacturing BdF services 13 Dec 13 Dec Dec *from Q2 28 to Q2 29; and from Q to Q PMI-manufacturing survey France: survey data and the business cycle Business climate PMI services survey recession France: business climate (all sectors) long-term average France: PMI manufacturing France: PMI services (activity) Consumer confidence 11 France: consumer confidence Jobless claims ' France: jobless claims (y/y) unemployed (y/y) long-term average recession presidential elections -4 7 * 2 datasets: jobless claims from Pôle Emploi, unemployed from INSEE Household spending y/y% France: household consumption Expenditure on goods Vehicle sales 's scrappage bonus France: car sales (12-month sum) Sources : Thomson Reuters,Markit,Oddo BHF Securities This document was printed for Alice PHILIPON on Wednesday, April 11, 218 1:54:17 PM. Page 3/5

4 Wednesday 11 April 218 Appendix chart: activity, inflation, credit, finances Industrial output y/y% France: industrial output (3m/3m% annual rate) Real GDP % France: real GDP q/q% (annualised) y/y% Great Recession mild recession -2-8 Headline and core inflation y/y % France: headline CPI core CPI (INSEE definition*) * excludes public sector prices, the most volatile prices and tax measures Private sector credit Trades of goods bn EUR France: exports of goods imports of goods balance (12m sum, rhs) Credit conditions for businesses y/y% France: credit to non-fin.corporate... to households net % 4 2 France: corporate financing conditions (AFTE survey) (+) easing average (-) tightening Bank refinancing at the ECB Government budget bn EUR 25 France: bank refinancing at the ECB (MRO+LTRO) bn EUR France : central government budget (12m rolling sum) % GDP % GDP -175 Sources : Thomson Reuters,AFTE,Oddo BHF Securities This document was printed for Alice PHILIPON on Wednesday, April 11, 218 1:54:17 PM. Page 4/5

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