One year on from François Hollande's social-liberal shift

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1 # $T ypcap$ $Industr y$ $Categ orie$ $IsWipSource$ $IsWipPending $ $IsWipEmpty$ $compi d$ 2 Page 1/5 unununun Focus France N One year on from François Hollande's social-liberal shift Thursday 5 March 215 Bruno Cavalier- Chief Economist bcavalier@oddo.fr +33 () A year ago, François Hollande altered the priorities of economic policy, executing what many observers described as a social-liberal shift. This expression is devoid of meaning. Let us say rather that this corresponded to the moment when a president elected as a socialist acknowledged that socialism does not work. Growth cannot be stimulated by fiscally pounding the middle classes (re-named "the rich"). Jobs are not created by stigmatising business leaders. Budget deficits are not narrowed by maintaining a sclerotic public sector. What is the result one year later? A meagre one. What has really changed, and for the better, is the external environment (euro, oil, interest rates). The fortnight s focus Consistent with his image as a mediator, François Hollande has spent almost the first two years of his mandate attempting to reconcile elements which are irreconcilable. On the domestic front, by attempting to combine his promise of economic stimulus with particularly tight budgetary constraints. On the international front, in attempting to find his place between the eurozone core and periphery, as France has the borrowing rate of a northern European country and the deficits of a southern one. The failure of his strategy, both in economic and electoral terms, prompted a change in his message, government and priorities. Let us attempt an evaluation of this shift one year later. Change of message The innumerable announcements, systematically refuted by the facts, of an imminent downturn in unemployment reflected a denial of reality. They have been discontinued, which may be regarded as an act of intellectual salubrity. The announcement of a "responsibility pact" in January 214 was a serious attempt to acknowledge that the health of the French economy depends on that of its businesses. The anti-business stance has also stopped. Change of government The selection of Manuel Valls as Prime Minister changes how affairs are conducted on two points. On the one hand, since he comes from the right wing of the Socialist Party, he does not, unlike certain socialists, reject the market economy or the constraints of globalisation. Almost 2 years after it was coined, he could adopt Tony Blair's motto: "What counts is what works". On the other, with his somewhat authoritarian manner, he favours action over maintaining a permanent consensus. This personality trait, good or bad depending on your viewpoint, caused the government to be purged of its most dogmatic, anti-reform members, but at the same time, weakened his parliamentary majority. Change of priorities Early 214, it seemed obvious that the fiscal effort could no longer rely solely on further tax increases without the risk of tipping the economy into recession. The agenda of the fiscal adjustment process was therefore changed A programme of spending cuts was announced ( 5bn out to 217), but its content remains still unclear at this stage. In September 214, there was no denying that the fiscal targets would not be reached. To avoid censure from Brussels for its lax attitude, the government is now displaying some ambition for reform. With his wideranging bill aimed at eliminating rigidities which are curbing economic growth, Minister Emmanuel Macron is playing his role of anti-sanction wild-card. That said, the game of cat and mouse between France and the Commission is probably not over yet (see p2). All in all, the debate between the supporters of a demand stimulus policy and the advocates of supply-side economics has been won by the latter camp. But their victory is not complete. The examination of the Macron Bill by the National Assembly revealed the presence of significant political forces, on both the left and the right, who prefer inertia. The decision to stop increasing taxes on households and to cut employer contributions is welcome. Yet, a broad category of reforms has yet to be explored - those which would reshape the role and weight of the public sector in the economy. Conflict of interests: Oddo Securities, a division of Oddo et Cie, limited sharepartnership - Bank authorised by ACPR. Oddo & Cie 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.

2 Page 2/5 Thursday 5 March 215 The fortnight s economic newsflow The INSEE business climate index was unchanged at 94 points in February, for the fourth consecutive month (the historic is 1 points). At first glance, this implies that the modest pace of growth in the second half of 214 (.2% q-o-q on ) will not see any marked improvement at the beginning of 215. The Banque de France model nonetheless assumes real GDP growth of.4% q-o-q in Q1. Moreover, the differences between the INSEE and PMI surveys are puzzling (without prejudging which one is right). The PMI-manufacturing index declined sharply in February, especially the order component, whilst the INSEE survey showed a marked brightening of personal production prospects. Conversely, for services, the PMI index reflected a very sharp increase, at its highest point since summer 211, whilst the INSEE index showed no noticeable improvement. Households are regaining optimism. Whilst the confidence index remains low (at 92 points in February vs an of 1), at least it reflects an upward trend since the end of summer 214. Households have noted that weak inflation provided support for their purchasing power. Unemployment expectations, although still high, have been falling in recent months. At the same time, the future standard of living indicator is picking up. All told, expenditure intentions have surged to their highest levels since October 27. Whilst significant differences between intentions and reality can occur, in the present case, there is no contradiction. Household spending on goods rose by.6% m-o-m in January, after a jump of 1.6% in December. Although several press reports indicated that winter sales were sluggish and had been negatively impacted by the terrorist attacks in January, there was no trace of this in the macroeconomic data. The rise in spending is relatively widespread; it concerns the energy, clothing and durable goods (cars, household equipment) segments. At this stage, private consumption is looking robust for Q1 215, which should partly be reflected in GDP growth, barring a concomitant surge in imports. One piece of good news invariably leads to another - but the latter is probably more fragile in this case. The number of unemployed in category A contracted in January (-.5% month-on-month), marking only the second decrease since the summer of 213. It would probably be premature to see this as a reversal of the uptrend (+.5% per month since 21) especially since the number of unemployed with reduced activity has risen. On 27 February, the European Commission (EC) set new targets to close the excessive deficit procedure initiated in 29. At the time, the deadline for getting the deficit back on track was set for 212. In 21, it was pushed back to 213. In 213, it was postponed to 215. It is now set for 217, the year of the next presidential election. According to the EC, the public deficit must come to 4.% of GDP in 215, 3.4% in 216 and 2.8% in 217. This implies an additional structural adjustment of.2% of GDP in 215 (i.e. around 4bn) that France must define before end-april and implement by 1 June. For 216 and 217, the additional measures required are evaluated at just over one point of GDP per year. As the EC only factors in half of the 5bn of the spending "cuts" already promised, the French government must therefore specify how the other half should be made and identify additional savings of 3bn over three years. François Hollande repeated that no new taxes would be introduced by 217 and that this year, the requested adjustment would be achieved via fresh savings. The French government has just sold 4% of its stake in Safran which should bring in around 1bn. The saga of excessive deficits in France is probably far from over. Forthcoming events The agenda is set to be political. Departmental elections are to be held on 22 and 29 March. Surveys all predict major losses for the Socialist Party. They also indicate fresh gains for the Front National, which is likely to embarrass the centre-right opposition (UMP-UDI), since it is divided on which attitude to adopt in the second round in the event of its non-qualification (alliance with the FN or votes transferred to the Socialist Party). There is the possibility of a government reshuffle in the wake of these elections. The severity of the Socialist Party's defeat will have repercussions for the party at its next congress in June. The Macron law has been submitted to the Senate (under a right-wing majority) where it will be debated as of 7 April. The law will be back in parliament in May for its definitive adoption, possible via a non-voting process as was the case for its first reading.

3 Page 3/5 Thursday 5 March 215 Appendix chart: business climate, confidence, households Confidence indicators Current Expansion Recession* Index Feb Jan Dec 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 Dec - Dec 91 Dec *from Q2 28 to Q2 29; and from Q to Q PMI-manufacturing survey France: survey data and the business cycle index France: PMI output (manuf.) PMI new orders (manuf.) Business climate index PMI services survey France: business climate (all sectors) long-term index France: PMI output (services) PMI new business (serv.) 3 3 Consumer confidence Jobless claims index France: consumer confidence long-term ' France: number of jobseekers (cat.a) other categories Household spending Vehicle sales q/q% France: household consumption Expenditure on goods 2. 's 25 France: monthly car sales (seasonally adjusted) Sources : Thomson Reuters,Markit,Oddo Securities

4 Page 4/5 Thursday 5 March 215 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 mostly flat -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) 25 Credit conditions for businesses y/y% France: credit to non-fin.corporate... to households net % 4 2 France: corporate financing conditions (AFTE survey) (+) easing (-) tightening Bank refinancing at the ECB Government budget bneur 25 France: bank refinancing at the ECB (MRO+LTRO) bn EUR France : government budget balance (12m rolling sum) % GDP % GDP -175 Sources : Thomson Reuters,AFTE,Oddo Securities

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