01. OPTIMISTIC, BUT WILL THEY SOON SUFFER FROM RECRUITMENT DIFFICULTIES?

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2 1. OPTIMISTIC, BUT WILL THEY SOON SUFFER FROM RECRUITMENT DIFFICULTIES?

3 IN THE BALANCE OF OPINION ON ORDER BOOKS OVER THE LAST 6 MONTHS, THE HIGHEST LEVEL SINCE 8 +3 IN THE BALANCE OF OPINION ON THE ANNUAL TREND IN THE VOLUME OF CAPITAL EXPENDITURE, AT ITS HIGHEST SINCE IN THE BALANCE OF OPINION ON THE EXPECTED TREND IN SME BUSINESS ACTIVITY IN 18, REMAINING AT ITS BEST SINCE 11 Key points After several years of increases, SME growth is expected to hold steady at a high level in 18. In contrast, in the tourism and transport sectors are exceptions. After a particularly positive year in 17, these two sectors appear less upbeat than previously. In terms of jobs, the rise in recruitment has come to something of a halt. continue to benefit from a healthy financial situation with very positive conditions as regards access to credit. As in the previous year, more than half of plan to invest in 18. By volume, investment prospects are still looking favourable but showing no acceleration. Obstacles to investment encountered by senior executives remain at historically low levels. While the outlook for 19, as reported by SME executives in /June, is still highly fragile, it reflects a resilient level of optimism while implying that the cycle has reached, if not a high point, a plateau likely to last a while. In fact, a slight short-term decline in order books and the continued increase in recruitment difficulties both raise questions about future capacity for acceleration. IN THE BALANCE OF OPINION ON THE CASH POSITION FOR THE LAST 6 MONTHS, WELL ABOVE ITS LONG-TERM AVERAGE 4

4 In 18, turnover and employment growth are marking time After several years of recovery, growth in turnover is expected to hold steady at a high level in 18. At its best level since the end of 11, the balance of opinion on change in turnover for the current year stands, as it did in November 17, at +26 points in the first half-year of 18 (graph 1). This indicator is still comfortably above its long-term average (+18 points). Beyond questioning future capacity for expansion, the lack of fresh acceleration reflects the observed slowdown in economic growth in the first quarter, and the drop in INSEE s latest figures on the business climate (the index held steady in June at a level higher than its long-term average after 5 consecutive months of falls). GRAPH 1: TRENDS IN BUSINESS ACTIVITY AND WORKFORCE NUMBERS FOR THE CURRENT YEAR BALANCE OF OPINION (AS A %) Turnover Workforce year average -year average Note: the net balance of opinion on the trend in business activity for the current year stabilised at +26 between the November 17 and 18 surveys. It has risen 5 points in 1 year. Source: 5 76th BUSINESS CLIMATE SURVEY 6

5 The stabilisation of average business growth prospects however hides significant disparities (graph 2): the balance of opinion rose in industry (up 2 points to +3) and services (up 2 points to +28); the balance of opinion fell in tourism (down 12 points to +14) and transport (down 11 points to +25), both these sectors being affected by transport strikes and oil price increases; high-export and medium-export, innovative and with or more employees foresee (over and above the anticipation that their turnover will rise more than average) even more robust growth than previously. It is in contrast to non-exporters, those not deemed innovative, and micro-businesses. Senior executives optimism here is based on their order books, both current and future, which are still bulging. The balance of opinion indicator on their position for the last 6 months stands at +12 (its highest since 8), up 2 points over 6 months, and up 14 points over one year. At the same time, while it might have decreased slightly (-2 points over 6 months), the predictor for the coming 6 months remains at a high level (+13). Order books in industry appear thinner but still healthy. GRAPH 2: TRENDS IN BUSINESS ACTIVITY FOR THE CURRENT YEAR BY BUSINESS SECTOR BALANCE OF OPINION (AS A %) In response to anticipated business levels that are still vibrant but with no acceleration, senior executives are easing the pace of recruitment (new employees in the first halfyear). At +15, the balance of opinion on changes in employment lost 2 points compared with November 17, but is still distinctly above its long-term average (+9). Only in the industrial sector was the pace of recruitment stepped up in the first halfyear (climbing 4 points to + points - graph 3) while it slowed down significantly in transport (balance of opinion down 13 points to +15). Moreover, while the more downbeat attitude to employment is shared across all sizes of, innovative or otherwise, those categorised as high-export are, meanwhile, showing greater resilience. At the same time, a growing, and record, proportion of are seeing significant recruitment issues (insert 1). GRAPH 3: TRENDS IN EMPLOYMENT FOR THE CURRENT YEAR BY BUSINESS SECTOR BALANCE OF OPINION (AS A %) Industry 13 Construction 14 Commerce 15 Transport Nov. 17 Services Construction Commerce 15 Transport 16 Tourism 17 Service Nov Source: Source: 7 Tourism Industry 8

6 Recruitment difficulties, business and employment growth, and SME responses An increasing, and record, proportion of are seeing significant recruitment issues: 41% of them are currently experiencing difficulties versus 34% one year ago. This is the highest proportion since 2. Difficulties are of particular resonance in automobile dealing and repair (53%), intermediate goods (48%), capital goods (49%) and transport (48%). However, the correlation between recruitment difficulties and growth in turnover and employment is high (.8 with the balance of opinion on employment, and.7 with the balance of opinion on turnover over the period -18), which means these factors tend to develop in tandem (without meaning any causal link exists). However, we can assume that while the current level of recruitment difficulties is not preventing from growing (although it could slow down business in some cases), if these difficulties worsen, this could hamper future expansion, particularly their ability to accelerate. respond differently to these difficulties. According to the results of the Bpifrance Rexecode quarterly survey(1) in 18, the majority (55%) are planning to make changes to their recruitment processes and slightly more than a quarter to increase the salaries offered. They are also attempting to overcome these difficulties by using outside staff (temporary workers, subcontracting, secondments), by expanding the skills sets of existing employees, by training or lengthening working time, or by offering financial perks to retain employees. On the other hand, they are making relatively few changes to their general organisation, which would entail increased investment in work automation or a new work organisation based on mobility solutions. GRAPH 4: SME RESPONSES TO DIFFICULTIES IN RECRUITMENT RESPONDENTS INTENDING TO RECRUIT STAFF (AS A %) Introduce mobility or telework solutions Acquire skills through company acquisitions (mergers, acquisitions) Make use of partnerships Investing in work automation according to the quality of the candidate Increase the amounts allocated to recruitment Outsource more to subcontractors Ask existing employees to perform new tasks Organise training activities for the existing workforce Increase the working hours of existing employees Make more use of temporary workers or secondments Change your recruitment methods Use of external labour Changes in positions vacant Changes in recruitment policy Changes to a company s organisation (1) Trésorerie, Investissement et Croissance des TPE et PME businesses] conducted between and 18 April 18, using a questionnaire distributed digitally to in nonthan 5 million in turnover. The full results of the survey are available at 9 Source: /Rexecode quarterly survey conducted using a sample of 319 respondent

7 less optimistic about their turnover prospects but recruitment expectations hold firm for 19 GRAPH 5: EXPECTATIONS FOR THE TREND IN BUSINESS ACTIVITY FOR THE FOLLOWING YEAR BALANCE OF OPINION (AS A %) are expecting a slight decrease in turnover growth for next year. Slightly below its long-term average (+27), the business activity predictor has dropped 3 points over one year, to stand at +26 (graph 5). It is suffering in particular from reduced SME optimism in transport (balance of opinion down 11 points to +16), construction (down points to +8) and tourism (down 7 points to +18), all showing a decline. Even industry and services have fallen, albeit to a lesser extent. As usual, exporting (balance of opinion at +46 compared with +51 last year) and innovative (+48 compared with +49) are the most confident about the future and show greatest resilience. Despite slightly reduced optimism in turnover expectations, the impetus for recruitment appears to remain, with even a small increase in 19. Above its long-term average (+16), the employment predictor has climbed 2 points in one year, to stand at +24, its highest point since 8. The average indicator is pulled upwards by industry (balance of opinion up 5 points to +29) and tourism (up 4 points to +6), but downwards by transport (down 7 points to +16) and construction (down 3 points to +14). In the final analysis, the most optimistic companies are those with employees or more, and those that innovate and export Turnover Workforce year average -year average Note: the balance of opinion on the expected trend in business activity for the following year dropped by 4 points over 1 year to stand at +26 in 18. Source: 11 12

8 A still comfortable financial situation... Since the start of 17, cash flow situation has held steady, and at a very satisfactory level (graph 6). With a balance of opinion standing at -8 (up 1 point over one year; down 1 point over 6 months), identical to its pre-crisis level (November 7), the average opinion of on the cash flow situation still stands well above its long-term average (-18.3). Over the last 6 months, cash flow in industry (balance of opinion up 4 points to -5) has improved, in contrast to transport (down 13 points to -18) and tourism (down 6 points to -22). Note too a worsening situation in business-to-consumer services (down 6 points to -5). Over the next 6 months, cash flow situation appears comfortable (balance of opinion up 1 point over 6 months to +4). In tourism, the figure shows a distinct improvement (balance of opinion up points to +4) in the wake of the summer season returning. GRAPH 6: AVERAGE OPINION ON THE CASH FLOW SITUATION BALANCE OF OPINION (AS A %) Last 6 months Next 6 months year average -year average Source: 13 14

9 ...and still very favourable terms for access to credit during the first half of 18 remained easy. Only 15% of said they had run into difficulties in obtaining the desired short-term finance, a stable proportion over one year and the lowest since the question was introduced in (graph 7). Viewed by sector, tourism is seeing greater difficulties with figures well above the average (27%, up 3 points compared with November 17). By contrast, these difficulties are less frequently encountered in public works (11% after 18%) and wholesale (11% after 13%). Over the last 6 months, access to short-term credit improved a little for with between and 249 employees (13% encountered difficulties, versus 15% in November 17) and the figure held steady for micro-businesses (17%). Access to credit for capital expenditure (capex) is also at its best level since. Consistently under % since the first half of 16, the proportion of reporting issues accessing credit facilities for capex purposes dropped one point over the half-year to just 6%. However, difficulties continue to be encountered most frequently in tourism (13%), while just 3% of in the capital goods sector are affected. FAIRLY OR VERY DIFFICULT (AS A %) Nov. Nov. Nov. Nov. Nov. Nov. Nov. Mai Less than employees to 25 employees In total Source: 15 16

10 Capital expenditure forecasts for 18 still upbeat Obstacles to investment at historically low levels In 18, a significant proportion of businesses continued to report that they had either already undertaken capex or planned to in 18 (49%, versus 5% one year ago, this figure being the highest proportion since the start of the crisis in 8). Between 17 and 18, obstacles to investment encountered by remained overall at an all-time low, and in fact the three main factors cited by senior executives even continued to decline: By volume, capex prospects are still looking favourable but showing no acceleration (balance of opinion up 1 point in one year, to +3, the highest since 12, see graph 8). weak demand dropped 8 points to just 47%; Anticipations for capex spending are distinctly higher in the automobile dealing and repair sector (indicator up 16 points in one year to stand at +14), in transport (up 12 points to +, although the balance of opinion on turnover meanwhile shows a definite drop), consumer goods (up 8 points to +2) and public works (up 8 points to +15). Conversely, they are down in tourism (by 6 points, to -12). competition dropped 4 points to 37%. inadequate profitability dropped 5 points to just 39%, reflecting the general strong financial health of ; GRAPH 9: OPINION ON OBSTACLES TO INVESTMENT PROPORTION OF RESPONDENTS (AS A %) GRAPH 8: AVERAGE OPINION ON THE CAPEX TREND IN THE CURRENT YEAR MAY ANSWERS 8 BALANCE OF OPINION (AS A %) Transport Industry Tourism Business-to-business services In total Note: in 18, 26% of said the volume of capex was up compared to 17 and 23% said it was down, giving a balance of opinion indicator of +3. Cost of credit 8 Equity Demand Level of borrowings Competition 18 Source: Source: 17 18

11 In conclusion SME impetus expected to remain at a high level in 18. turnover is likely to continue to maintain its momentum this year, like the French economy itself which is growing above its potential rate despite an expected slowdown in GDP growth (from 2.3% in 17 to 1.7% this year according to the latest forecasts from the French national statistics office, INSEE). While the outlook for 19 is still highly fragile, it reflects assessment that the situation shows grounds for optimism while implying that the cycle has reached, if not a high point, a plateau likely to last a while. In fact, on the demand side, order books are slightly less full. On the supply side, investment is sustained but not accelerating. In addition, recruitment constraints seem to be an increasingly powerful hindrance to expansion of the business cycle. Moreover, questions over whether the top of the cycle has been reached are consistent with a more general macro-economic context featuring standardisation of monetary policies (which for is synonymous with higher borrowing costs and worse price competitiveness in exports), higher oil prices (involving higher production costs) and the rise of protectionism, among other factors. 19

12 Regional economic environment: summary Continuing the trend from 17, estimates for turnover and jobs in the first half of 18 were positive for all regions. All regions anticipate business growth of at least 2%. in Occitanie, Bretagne and Pays de la Loire are the most optimistic and expect an average increase in turnover of greater than 4.%. The same applies to job numbers, which have increased to a greater or lesser extent from region to region. In contrast, cash flow has suffered a little pressure over recent months, while nonetheless remaining satisfactory. Only in Auvergne-Rhône-Alpes have seen their financial situation improve, and to a lesser degree those in ProvenceAlpes-Côte d Azur, Hauts-de-France and Occitanie. BALANCE OF OPINION ON TREND IN TURNOVER AND WORKFORCE BY REGION (AS A %) France: Tur Emp Tur. +24 Emp. +7 Tur. +23 Emp. +11 Tur. +33 Emp. +22 Tur. +39 Emp. +25 across all regions consider their profitability in 17 better than it was in 16, with the exception of businesses in Bourgogne-Franche-Comté, where profits in 17 are reckoned to be lower. Tur. +22 Emp. +11 Tur. +3 Emp. +19 Tur. + Emp. +15 Tur. +24 Emp. +14 Tur. +29 Emp. +11 Tur. +29 Emp. +17 The detailed results by region are available as regional summaries at Tur. +25 Emp. +15 Tur. +23 Emp. +16 Average trend in turnover 2.% to 2.9% 3.% to 3.9% 4.% to 5.% Source: 21 22

13 TURNOVER Avg 8 to WORKFORCE Trend/ 17 Avg 8 to INVESTMENT Trend/ 17 Avg 8 to Trend/ 17 YEAR 18 (1) All employees Construction Commerce Transport Tourism Services Less than employees Industry YEAR 19 (1) All employees Less than employees Industry Construction Commerce Transport Tourism Services (1) Balance of opinion = (share of businesses anticipating a rise - share of businesses anticipating a fall)

14 2. METHODOLOGY

15 Definitions Indicator or balance of opinion is the difference between the percentages of opposing opinions: Indicator of trend = [(x% up ) (y% down )] x Indicator of level = [(x% good/easy ) (y% bad/difficult )] x The percentages of neutral opinions ( same and normal ), which take the balances up to %, are not taken into account in calculating indicators of this type. A business is considered innovative if it has taken at least one of the following 5 steps during the last 3 years: funded research and development expenditure (in-house or externally) or recruited R&D personnel; acquired an operating licence for a process or technology; filed a patent, a trademark, a design or a utility model; developed a new or significantly improved product or process (service provision) on behalf of a third party; marketed a new product, asset or service (other than simply reselling new products bought from other companies and excluding aesthetic changes or changes to the packaging of products already in existence), or has used a new production, marketing or organisational process (or method). Furthermore, no similar product or process should already have been marketed or used by competitors. A business conducts over 1 quarter of its business internationally, a business between 6% and 25%, and less than 6% (including %)

16 Sample structure For this 67th half-yearly SME business climate survey, 25,243 non-agricultural commercial companies with 1 to fewer than 25 employees and a turnover of less than 5 million were surveyed in and June 18. The report is based on the first 3,573 responses judged complete and reliable received before 19 June 18. 5% to 25 7% employees SIZE 5 to 99 employees 39% INNOVATIVE NATURE 32% Innovators 1 to 9 employees 25% to 49 employees 68% Noninnovators 24% to 19 employees 11% BUSINESS SECTOR 27% (4) 27% (1) Services Industry 5% 6% 13% Medium exporters 13% (2) Tourism Transport EXPORT High exporters 76% Construction Non-exporters 22% (3) Commerce (1) (2) (3) (4) 29 3% food, 13% intermediate goods, 8% capital goods, 3% consumer goods. 11% construction, 2% public works. 2% automobile dealing and repair, 13% wholesale, 7% retail. 23% business-to-business services, 4% business-to-consumer services. Source: 3

17 Réf : ISSN : July 18.