FRANCE Macroeconomic scenario for A launch window for growth

Transcription

1 No.15/12 28 April 215 FRANCE Macroeconomic scenario for The current environment is favourable to a quickening in the pace of French growth. This is, in fact, what has been forecast for Q1, with a sustained increase in real GDP (+.4% q/q, after +.1% q/q in Q4 214). Yet when one analyses the composition of growth over the recent period, one cannot but feel disquiet about the French economy. The low level of investment, in terms of both quantity and quality, is a real problem in these post-crisis times. Our scenario is based on this two-sided picture. The more upbeat environment bears out our forecast for quickening growth, but the structural limitations explain its lack of momentum. Growth remained modest in 214 (+.4% over the full year), the third year in which we have seen a limited increase in real GDP. Some favourable factors should nevertheless be highlighted: Household purchasing power rose by an annual 1% after the stabilisation observed in 213. Low inflation (an annual +.5%) has significantly contributed to this result. The increase in nominal gross disposable income also helps to explain this improvement, despite the less dynamic trend in welfare benefits. Social security and tax takes have risen more slowly, for one thing (+2.1%, after +4.2% in 213), due to the different approach taken to fiscal adjustment. For another, earned income has picked up (by 1.3%, compared with.9% in 213), due to the slight rise in total employment over the full year (an annual.3%, after a fall of.2% in 213). Business margin ratios have stopped eroding. After marked falls in three consecutive years, the roll-out of the CICE competitiveness and employment tax credit, plus the fall in oil prices observed in the second half, resulted in the virtual stabilisation of non-financial company margin ratios in 214, at 29.7% (after 29.8% in 213 and 3.5% in 212). q/q, % 1,,5, -,5 France: breakdown of NFC margin ratio CICE -1, 3/214 6/214 9/214 12/214 Other factors Soc. security levies Productivity "Oil price effect" AV Prices/Cons. prices Real wages Change in margin ratio The French economy thus began 215 with a more favourable situation for the finances of households and businesses. But is this enough to trigger a self-sustaining recovery cycle? Group Economic Research

2 Pace of growth forecast to quicken in Q1 215 Lower oil prices and the depreciation of the euro will have borne fruit in early 215. The positive overhang left at the end of February by industrial production (+1.2% q/q) and household consumption of goods (+1.9% q/q) points to more vigorous growth at the start of the year. The surveys published since the start of the year have confirmed the trend. For businesses, Insee s global business climate survey has gained two points since December, rising to 96 in March, its highest level since April 212. In the manufacturing industry, although confidence levels have certainly been stable at 99 since December, the personal production outlook is now running above its trend level. In services, the business climate, although still fragile, has also been improving since December, gaining one point, to 93, while components of forecast activity and demand are also picking up. This slightly more positive trend in services has been confirmed by the sector PMI, which is still in the activity expansion zone (52.4 in March, up from 5.6 in December). Household confidence levels are also up (+3 over the quarter, at 93) and the opportunity to make major purchases component (which correlates well with consumer durable spending) is now running at close to its trend level. France: Household confidence Balance of replies, picking up Balance of replies, points points Household confidence Opportunity to make major purchases (rt) -24 Our scenario assumes a.4% rise in real GDP in Q1, after a rise of.1% q/q in Q Household consumption is forecast to pick up by.5% q/q, after rising.2% q/q in Q4 as purchasing power benefitted from the observed fall in prices (the CPI shed.3% in the 12 months to February 215). Total investment is likely to see a smaller fall than in the previous quarter (-.1% q/q, after -.5% q/q), as the correction to household investment tails off. The downturn in business investment should bottom (+.1% q/q forecast, after contracting for four quarters in a row), buoyed by stronger demand and an improving business climate. The improvement in business leader confidence, and, in particular, the improvement in expectations of future demand, raises hopes of a positive contribution from changes in inventory levels (+.1 of a percentage point, after -.2 of a point in Q4 214). The contribution from foreign trade could be slightly negative, as imports are still being sustained by the small recovery in domestic demand. Oil price fall a decisive support factor Estimates of its impact on activity A considerable number of estimates of the impact of falling oil prices on economic activity have been produced recently, with sometimes divergent results, depending on the institution. To take several examples: on the basis of a 1% fall in the oil price, the estimated impact in the Eurozone at one year is.1 of a point of extra growth according to the ECB, the European Commission, and the IMF, but is zero for the OECD. The gap widens at two years, with the ECB, the European Commission and the OECD estimating the impact at an additional.2 of a point of growth; for the IMF however, the impact is.4 of a point. In the case of France, the ECB estimates that a 3% drop in the oil price would have zero impact in the first year, deliver.1 of a point of additional growth two years out, and another.1 of a point at three years. Insee is a tad more optimistic. On the basis of a similar fall in the oil price, it estimates the positive impact at.2 of a point by mid-215. For France, our own scenario sees a positive impact amounting to.2 of a point of extra growth in the first year on a 3% fall in Brent prices. The impact on activity comes mainly via two transmission channels. For households, lower energy prices result in lower consumer prices, which means greater purchasing power. For businesses, the lower rate of increase in intermediate consumption prices boosts their margins. The improved profitability can be allocated in a variety of ways, and in particular to investment or higher dividends 1. To validate the estimate we have used in our scenario, we analysed the episode, when the dollar price per barrel of oil fell 65% in six months. We focused our analysis on company margins, a point that seems essential to 1 For an explanation of the transmission channels for the fall in oil prices on activity and prices, see the charts in the appendices to the present document. No. 15/12 28 April

3 us today for the future of activity in the medium term. At the time of the oil countershock, a drop in the value of intermediate consumption was observed, having grown by no more than an annual.3%, dragged down by the fall in Other Manufacturing Transportation and Storage intermediate consumption in coking-refining (-4% for all branches). Some sectors had been severely affected, such as transport or the manufacture of other industrial products. Agriculture Forestry and Fishing Wholesale and retail trade. repair of motor vehicles and motorcycles Branch total Intermediate consumption - coking and refining Intermediate consumption - total Value-added Sources: Insee. Crédit Agricole S.A. Change from 1985 to 1986 (%) The improvement in the terms of trade as a result of declining input prices had brought in its wake an increase in the margin ratio of non-financial companies, up from 28.4% in 1985 to 31.8% in The investment ratio subsequently picked up in 1987 (+.6 of a point) and 1988 (+.6 of a point). Last, real GDP growth rose to 2.3% in 1986 and by an annual 2.6% in 1987, as against 1.7% in France : decomposition of NFC q/q-1, % margin ratios 2,5 1,5,5 -,5-1,5 mars-86 juin-86 sept.-86 déc.-86 Other factors Soc. sec. levies" Productivity AV Prices/Cons. prices. Real wages Change in margin ratio Should we expect the same type of effect today? This seems unlikely, as the French economy s oil consumption patterns have changed, for businesses and households alike. For businesses, this is reflected, for example, in the decline in the coking and refining technical coefficient. The coefficient is defined as the relationship between intermediate coking and refining consumption by all branches and the total output of those branches. This has fallen sharply, from 5.5% in 1973 to just over 1% in 212. For a total output of 1 euros (21=1), the branches consumed 1.4 euros on average (21=1) of coking and refining products in 212 as against 5.5 euros (21=1) in 1973 and 3.5 euros (21=1) in 1985, taking into account, among other things, changes in the structure of the economy (eg, an increase in the share of services in value-added) and gains in energy efficiency. Technical coefficients for coking and refining vary considerably from one sector to another, but the general downtrend is common to all sectors % France : Technical coking and refining coefficient Branch total Agriculture, forestry and fishing Other manufacturing Transportation and storage (rt) For households, the proportion of energy in consumer spending by households has fallen, from 1.2% in 1985 to 8.15% in 214. CPI w eightings Total 1 Food Tobacco 199 Manufactured goods Energy 815 o/w oil products 418 Services 4 74 These weightings represent the share of spending associated with the aggregate concerned as part of total household consumption spending covered by the CPI. Hence, the downside impact of falling oil prices will certainly be smaller than that observed historically, which goes along with the estimate used in our scenario % No. 15/12 28 April

4 Is France benefitting more from falling oil prices than the Eurozone as a whole, or less? France s degree of dependence on oil is currently lower than the Eurozone average, as suggested by several indicators: The share of oil in energy consumption is 33% in France, as against 39% in the Eurozone; The share of energy-intensive sectors in valueadded is lower in France, at 6.7%, than in the Eurozone (9.4%); Even in the transport sector, characterised as it is by a high coking and refining technical coefficient, energy intensity, ie, the relationship between the sector s energy consumption and its total consumption, is lower in France than in the Eurozone. Analysis of these data therefore seems to point to a lesser impact on activity from the drop in oil prices in France than in the Eurozone. Despite this, France is more constrained than other Eurozone countries by the limited profitability of non-financial companies. The improvement in the terms of trade, for example, in the wake of the fall in oil prices and its positive impact on margins could help to minimise the negative impact of those constraints, ultimately having a greater utility in France than elsewhere in the Eurozone. The impact could, therefore be smaller, but more decisive for the economy. And what effect has the euro s depreciation had? There is also an abundant literature on estimating the impacts of the euro s depreciation on economic activity. A 1% depreciation of the euro would result: According to the ECB, in a favourable effect on Eurozone activity of an additional.1 of a point of GDP growth at one year, and.4 of a point at two. According to the OECD, in a more optimistic positive impact of an additional.7 of a percentage point of GDP growth in the Eurozone at one year, then 1.3 percentage points at two years. For France, our scenario uses a positive impact of.2 of a percentage point of additional growth the first year, for a 1% depreciation of the euro against the dollar. NB: the impact is ultimately fairly homogeneous between France and the other Eurozone countries. While it is true that the impact of changes in the exchange rate is greater in France than in Germany, for example (France being characterised by a greater price-sensitivity of export demand) this effect is offset by the impact on domestic demand and hence on imports, in view in particular of the degree to which it is integrated into the total chain of value-added. The missing link: business investment Business investment is the single most important component missing from the ongoing recovery in France. Its origin lies in the shortfall in demand. But, would the improvement in profits forecast for 215 be alone able to guarantee a slight improvement on the investment front? French company profits are forecast to be higher in 215. The fall in oil prices is helping to drive an improvement in margin ratios via an improvement in the terms of trade due to lower input prices. The higher profits should also be sustained by recentlyimplemented structural reforms, including: The CICE competitiveness and employment tax credit. This is calculated as a proportion of the wage bill, excluding salaries higher than 2.5 times the SMIC minimum wage. It has been ramped up in 215, rising from 4% to 6% of the wage bill as defined earlier. The Responsibility Pact. In addition to the planned cut in company income tax, the Pact also includes two tranches of payroll tax cuts: the abolition of employer URSSAF social security contributions from 1 January 215 at SMIC level, and a change in the scale of existing cuts between the SMIC and 1.6 times the SMIC (4.5 billion euros); and a 1.8 percentage point cut in Family contributions on salaries of up to 3.5 times the SMIC (corresponding to over 9% of salaries) from 1 January 216 and worth 4.5 billion euros. Moreover, the Growth and Economic Activity Bill, known as the Loi Macron, is currently being examined by the French upper house, the Senate. The bill embraces a multitude of topics grouped by three main themes: lifting economic restrictions (with measures aimed, eg, at the coach transport sector and regulated legal professions), boosting investment (eg, by strengthening procedures for protecting businesses, and improving financing by streamlining employee savings schemes, in particular), and creating jobs (with exceptions to Sunday and evening work requirements, and a reform of industrial tribunals, among others). The impact of these measures on company profits is mixed. The effect of the CICE has, so far, been disappointing (see our focus on this point). The Macron Bill has yet to be adopted, but the rise in profits it could deliver would be indirect and marginal. The Responsibility Pact should have a more significant and lasting impact. Our scenario includes an improvement in the margin ratio of non-financial companies to 31.3% in Q1 215, up from 29.9% at end-214. On average, over the full No. 15/12 28 April

5 year, it should rise to 31.6% in 215 and 32.3% in 216 (as against 29.7% in 214). % France: NFC margin and investment ratios y/y % Margin EBITDA/VA Investment - volume (rt) The question is: will this increase in the margin ratio be alone sufficient to re-boot business investment spending? It will be the case if businesses have needs that they have not been able to meet up to now for lack of a financial situation enabling them to do so, or if the increase in the margin ratio has a sufficiently positive effect on confidence to trigger a virtuous spiral. No pressures on production capacity Initially, therefore, we need to ask about current use of industrial production capacity. Several indicators allow us to take the pulse of the underor over-utilisation of company production capacity. The industrial capacity utilisation rate (CUR) is one such. This is currently well below its trend rate. estimated France: investment ratio and CUR % % factor in a company s decision to invest is its expectations of future demand. If this is very dynamic, it could trigger an acceleration in investment spending, even though the production base is under-used. Even so, this is not what transpires from the quarterly Insee survey of industry. In late 214, the balance of opinion on total demand addressed to manufacturing industry was down slightly, to below its average trend level France: forecast total demand in manufacturing Forecast total demand Production bottlenecks are also interesting to watch. These represent that proportion of businesses which, if they received more orders, would be unable to produce more with their current resources. Since 212, this component of the quarterly survey has fairly closely tracked its longterm average. Overall, therefore, businesses are replying that they have the capacity to meet addressed demand. % 5 Balance of replies Forecast foreign demand France: pressures on production base % CUR LTA Capacity utilisation rate That said, a low CUR and an upturn in investment are not incompatible as was already observed during the crisis of 1993 because the indicator only reflects the degree of pressure on the industrial sector, which accounts only for a quarter of capital investment in France. Moreover, one key 2 NFC investment ratio (rt) LTA production bottlenecks Production bottlenecks in industry productive capacity utilisation rate (rhs.) Less need to renew production resources Although at first sight businesses to not need to invest in order to boost production capacity, they could be inclined to invest to renew, upgrade or improve the quality of their production resources to 8 No. 15/12 28 April

6 boost their competitiveness by moving up-market, or into future growth sectors, for example, following a lengthy crisis that has limited investment spending. Business leaders say, moreover, that their chief motivations for investment are renewal, followed by modernisation, and then rationalisation. in % France: economic motives driving investment Renewal Modernisation, rationalisation Increasing production capacity Launching new products Other (safety, environnement) That said, the investment ratio has proved more resilient in France than elsewhere in the Eurozone, which limits the need for renewal as businesses emerge from the crisis. Limited business leader confidence Confidence is also a key factor in determining business investment profiles. So far, however, the impact of the structural measures implemented and the fall in oil prices have had a somewhat disappointing impact on the business climate, with no very marked recovery being observed. France: Confidence improving only gradually Balance of opinion, %, seas.adj Overall business climate Business climate in manufacturing Business climate in services In view of all these factors, the recovery in profitability may well not translate automatically into a sharp acceleration in investment spending. This is the main thrust of the measures announced in early April by the French Prime Minister, namely to create the right conditions for improving company profits. The key measure is a 2.5 billion euro fiscal bonus spread over five years for businesses investing in manufacturing equipment. Businesses will be able to increase their depreciation by 4%, deductible from their tax base, throughout the depreciation period of goods acquired between April 215 and April 216. This system should help introduce a more automatic link between a company s margin ratio and its investment ratio. In addition to the relatively small amount on offer, we could well see, of course, a straightforward windfall effect, that collapses like a soufflé. But the real inherent risk in this type of measure is the deployment of a relationship that runs counter to the desired one: no investment, so no fiscal bonus, so no effect on profits. Our scenario does not include the emergence of this type of toxic spiral, only factoring in a sluggish improvement in business investment spending. At the end of the day, 215 is likely to be a transitional year for business investment, sandwiched between several years of a costly crisis in terms of confidence, and a more dynamic year of recovery, now forecast for 216. The main driving force: household consumption Household consumption will make the greatest contribution to growth in 215 and 216. The structural measures that will be ramped up or come into force in 215 will provide additional support for household purchasing power, which is already being sustained by the low level of inflation. The targeting of salaries used to calculate the competitiveness and employment tax credit (CICE) or to which the reductions in payroll taxes in the first tranche of the Responsibility Pact will apply, suggest a positive impact on jobs in the traded sector, which are more sensitive to the cost of labour on low wages. Earned income will benefit. The negative contribution of tax paid will also be lower in view of the Solidarity Pact which, it should be remembered, features a revision of the income tax scale for low-income households. No. 15/12 28 April

7 Contrib. %, y/y 2,5 1,5,5 -,5-1,5 France : Household purshasing power and its compents -2, Earned income Unearned income Cash welfare bfts Current tax Consumer prices Soc. Sec. paid Pch'sing power Household consumption should, therefore, continue to be the driving force for French growth. Its faster rate of acceleration relative to that observed in the Eurozone largely explains the French catch-up in 215 (also justified by Eurozone investment levels, hit by the known adjustments in the countries of the periphery). In the mid-term, this engine could stall, however, partly due to the forecast trend in the unemployment rate (set to simply stabilise in mid- 215 and then ease back very gradually in 216), and to the necessary fiscal adjustment. The public deficit for 214 stood at 4% of GDP, below the 4.4% estimated in the 215 Finance Act. The deficit is, therefore, down slightly relative to 213, when it stood at 4.1% du GDP. This positive surprise can be explained by the very moderate growth in public spending by value. Public spending grew by just 1.6% by value, compared with the initially-planned 2.3%. The spending cuts have, therefore, been significant, and greater than planned. The structural deficit has fallen by.5% and not by.1%. In closer detail, one may especially observe a drop in the value of intermediate consumption, a fall in interest charges, and a very marked fall in investment, especially at local government level, with the end of the local election cycle. On the receipts front, there were fewer surprises, with an increase of 1.9% by value, in line with forecasts. Volume GDP growth stood at.4%, again as forecast. The cyclical balance consequently moved as expected. In the 215 Finance Act, the public deficit has been set at 4.1% of GDP. The structural efforts should be marked on the spending side, with scheduled cuts of 21 billion euros. The cyclical balance should be more or less unchanged due to higher GDP and potential growth moving at the same rate of 1.1% by volume. There are, however, a number of biases relative to this official forecast. The 214 base effect is better than expected (4% and not 4.4%), which automatically narrows the 215 deficit by around.4% environ. Conversely, inflation is lower than expected, which has a negative impact on the calculation of the spending cuts. The European Commission feels that the 215, 216, and 217 structural effort is insufficient. Further savings of 4 billion euros have already been announced. In all, the 215 deficit could be smaller than forecast, and close to 3.8% of GDP. France is still under close surveillance. The European Commission has allowed France to postpone meeting its 3% deficit/gdp target until 217, in exchange for promises of further cuts and a new programme of reforms. No marked change in the other components Contribution from changes in inventories The variation in inventories component is difficult to forecast. When forecasting changes in inventories, the model generally used is the socalled accelerator model, based on past variations in demand. This has proven limitations, however as it is defective when it comes to capturing a number of atypical changes in stock variations, largely because it does not account for business leaders expectations of changes in demand. It is, therefore, useful to refer to business leader opinion, which can be done by analysing a number of surveys. According to the monthly Insee survey of industry, balances on inventories of finished goods are stable, below normal, and at their lowest since June 211. A sharp fall was observed at the start of the year. Inventories of finished products are, therefore, deemed to be more significantly below normal than at the start of the year. Business leaders may have been wrong-footed by higher than expected demand at the start of the year, suggesting that we might see some inventory building in the next few quarters. France : Insee survey and change in inventories Balance of replies, %, seas.adj Stock of finished goods component (Insee manufacturing survey) Volume change in inventories, bn (rt) bn No. 15/12 28 April

8 The PMI survey in manufacturing can be used to fine-tune the diagnosis, by calculating the ratio of forecast production (evaluated using the PMI s New Orders item) to the stock of finished products. This ratio is a good lead indicator for changes in inventory in the national accounts and, like the Insee survey, also signals a period of inventory building. Ratio 1,6 1,4 1,2 1,,8 France : PMI survey and change in inventories, PMI: New orders/stock of finished goods Volume change in inventories, bn (rt) Sources: Markit, Crédit Agricole S.A. Given slightly higher variations in inventory in 215, their contribution to growth is likely to continue positive (.2 of a percentage point). Contribution from foreign trade bn The contribution from foreign trade is again likely to be zero in 215 and 216, after a slightly negative impact on growth in Our own scenario features a faster rate of export growth in 215 (4.5%, after 2.9% in 214). Exports will benefit both from a slight improvement in European growth (especially in Germany and Spain) and from the euro s depreciation (see estimates of the impact on the euro s depreciation on economic activity on page 4). We should note, however, that the structural competitiveness shortfall will continue to restrict export growth. Imports should also be more dynamic (up 4.3%, as against a 3.9% rise in 214), sustained by an uptick in domestic demand (total domestic demand is forecast to contribute 1 percentage point to growth in 215, after.7 of a point in 214). However, given the gradual nature of inventory rebuilding and the ongoing correction to total investment, imports are likely to grow at a rate that is still below trend level (an average 5.1% over the 15 years from 1985 to 21). Correction to household investment set to continue The ongoing correction to household investment looks set to continue, even if the forecast pace of the correction is far slower in 215 than that observed in 214. The fall in housing investment in particular is forecast to be smaller than in 214, due to the forecast rise in new-build home sales as a result of various support measures. No. 15/12 28 April

9 Mechanisms driving the transmission of falling oil prices to economic activity Sources : Crédit Agricole SA Mechanisms driving the transmission of falling oil prices and the euro s depreciation to prices in general No. 15/12 28 April

10 Crédit Agricole S.A. Group Economic Research 12 place des États-Unis Montrouge Cedex Publication manager: Isabelle Job-Bazille Chief Editor: Jean-Louis Martin Information centre: Dominique Petit - Statistics: Robin Mourier Sub-editor: Fabienne Pesty Contact: publication.eco@credit-agricole-sa.fr Consult Economic Research website and subscribe to our free online publications: Website: ipad : Etudes ECO application available on App store platform Android : Etudes ECO application available on Google Play platform This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not warrant the accuracy or completeness of such opinions, nor of the sources of information upon whic h they are based, although such sources of information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication. No. 15/12 28 April