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France
Since mid-February, the economic situation has marginally improved. The good economic surprises outweigh the bad
ones, although only just. The positive surprises confirm the relative resilience of activity and its ability to rebound as the
confidence shock subsides; the negative surprises give reminders of the fierce headwinds and the downside risks (oil,
unemployment, fiscal austerity,…). Overall, they back up our scenario of positive but weak growth in 2012 (+0.5% as an
annual average). Its engines still stifled by the fiscal consolidation effort, growth is expected to build up a little speed in
2013, to slightly surpass +1%.
Narrow patch
Slightly more good than bad news
Since mid-February, the economic situation has improved marginally. From
lacklustre, the economic situation has become only just satisfactory, with good
surprises slightly outweighing bad surprises. The positive surprises include the
INSEE confidence surveys. After stabilising slightly in February, they posted a
sharp rebound in March (+5 points for households, +4 points for business
sentiment), but this probably merely corrects excessive pessimism and
reflects, with a time lag, the improvement in the PMI surveys between
November and January (chart 2).
These latter disappointed in March following already mixed figures in
February: stability of the services index, at 50.1, and a relapse in the
manufacturing sector, back in contraction territory (at 46.7, from 50). The
composite index therefore declined, from 50.2 to 48.7. For the entire first
quarter, it just reached the threshold of the expansion region (at 50), although
this was progress by comparison with its average level in the fourth quarter of
2011 (48.1). All in all, these various surveys, despite their discordance, lead
us to expect a slight contraction in GDP in the first quarter followed by modest
growth in the second.
The inflation figures for January and February are also among the good
surprises. In January, consumer prices fell 0.4% month-on-month, resulting in
more moderate year-on-year inflation of 2.3%, down from 2.5%, led by a sharp
decline in core inflation, from 1.8% to 1.5%. In February, this decline
continued, as core inflation slowed down further to 1.4%, while headline
inflation remained stable at 2.3%. Inflation is therefore apparently at last
beginning the expected slowdown. This slowdown, though limited, has every
chance of continuing, as downward pressure due to weak demand outweighs
upward pressure due to high commodity prices (chart 4).
Such moderation of inflation is good news for household purchasing power
and thus a supporting factor for personal consumption. This latter is severely
buffeted by the lack of household confidence, tax hikes, expensive gasoline,
rising unemployment, credit slowdown, uncertainties surrounding the election
campaign. The environment is less worrying than a few months ago but is still
not very conducive to spending (chart 3).
The 3% surge in household consumption in goods in February is deceptive,
since it was due to the cold spell in the first two weeks which resulted in
soaring spending on energy (+11.7%) and clothing (+5.7%). This spending will
probably suffer a backlash in March, especially marked since the weather was
much warmer. Moreover, February's growth masks a fall in purchases of
durable goods (-0.7%) and it follows two consecutive months of declining
household spending on goods (-0.4% in January following a similar decline in
December).
The 0.3% growth in industrial production in January, although modest, is the
last of the good news. Its increase was originally based on growth in the
manufacturing sector (0.2%). Year-on-year, it posts a decline which remains
slight (-1.5%) and which could well not go much further, based on business
sentiment surveys.
The labour market continues to concentrate the bad news. The unemployment
rate is rising, slowly but surely. It increased by 0.2 percentage point in the third
quarter of 2011, then by 0.1 percentage point in the fourth quarter. At that
time, it was as high as 9.8%, according to the latest INSEE employment
survey (figures for France as a whole). It has reached the 10% symbolic level
in January and February according to the Eurostat monthly statistics.
According to the INSEE, 22,600 payrolls were destroyed in the fourth quarter
of 2011 in the business sector, a bit less than in the third quarter (-31,500
jobs). We shall have to wait until mid-year, at the earliest, to see any
improvement. The unemployment rate should stabilize a bit below 11% by the
fall (more precisely, at 10.6%) and will remain close to this level in 2013.
A subdued environment
Growth in the fourth quarter of 2011 was confirmed at +0.2%, a performance
that singles out France as an outlier among its European peers and compare
to the Euro zone average (-0.3%). However, the detailed national accounts
shed light on less favourable details (chart 5): stagnation in the purchasing
power of disposable personal income (second quarter of decline per unit of
consumption); very high level of the personal saving rate (just below 17%) and
the financing surplus (close to 7.5%); very low and declining level of corporate
profit margins (just 29%).
The stagnation in purchasing power results from the high inflation rate equal
to the strong 0.8% rise in nominal income. As for the high personal saving
rate, it is the consequence of a very cautious behaviour of households in a
context of rising taxes and unemployment, recorded and expected. Both
elements do of course weigh on personal expenditures.
As for the low level of corporate profit margins, it is constraining non
residential investment. In a low growth environment, efforts to lift it must
focus on controlling production costs, thanks to productivity gains in
particular, which is easier said than done. A limited decline in the personal
saving rate, a small increase in the investment rate, and a partial support
from foreign demand explain the weakness of GDP growth, expected at
+0.5% in 2012 and +1.2% in 2013 as an annual average.
The INSEE, OECD and consensus forecasts all share low growth expectations
but they were also all raised recently. The recessionary period predicted by
INSEE in its December note has not only disappeared from its March
scenario, but the Institute now even forecasts no quarter of contraction. From
zero in the first quarter, growth is expected to reach +0.2% in the second
quarter. At mid-year, the growth carry-over would thus reach +0.5%. Aligning
itself on these figures, the government has revised up its own forecast for
2012, from +0.5% to +0.7%. In its interim March assessment, the OECD now
forecasts a smaller GDP decline in the first quarter (-0.2% QoQ annualised
rate versus -0.5% in November), and slightly more growth in the second
(+0.9% instead of +0.7%). Lastly, in the Consensus Forecasts March survey,
the mean growth rate is +0.2% for 2012 and +0.9% for 2013 (compared with
+0% and +1% respectively a month earlier).
A well-targeted fiscal deficit
Fiscal consolidation has moved forward without too much trouble until now,
but there is still a long way to go. The absence of any fiscal slippage is a good
point, but the absence of tangible progress is less encouraging. The official
public deficit and debt figures for 2011, just published by the INSEE, reveal a
significant reduction in the deficit by 1.9 percentage points, to 5.2% of GDP,
but an increase by 3.5 percentage points in the public debt/GDP ratio to
85.8% (chart 6).
For the third year running, the fiscal deficit has been lower than expected. The
improvement in 2011 is for a large part the result of discretionary fiscal policy
(end of stimulus measures like car scrappage schemes and first effects of the
August and November consolidation plans), since growth (at 1.7%) was close
to potential growth. This decline in the deficit is 40% due to the fall in
government spending as a proportion of GDP (from 56.6% to 55.9%), and
60% due to an increase in revenues (from 49.5% to 50.7% of GDP).
Spending, up 2.1%, increased more slowly than GDP (+3.3% nominal growth)
and at the same pace as inflation (it is therefore stable in volume terms), while
revenues surged 6%.
These positive trends should not make us forget that the deficit is still very
high, whether in total, structural or primary terms (close to 4%). It is still far
from the 3% level that would make it possible to stabilise the public debt/GDP
ratio. The trajectory of this ratio has not yet turned down, even though it is
approaching the critical 90% threshold and interest rates, though low, tend to
be higher than nominal GDP growth (chart 8). France has to rein in its fiscal
deficit, the sooner the better, as debt servicing is becoming heavier (+9.5% in
2011 to EUR 55.5 billion, i.e. 2.8% of GDP).
The government has revised its deficit target for 2012 from 4.5% to 4.4%. Its
growth forecast for 2013, although reduced from 2% to 1.75%, still appears
optimistic. The markets are rightly indulgent with France at present, but there
is no room for error. 2012 remains a high-risk year.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
France
Since mid-February, the economic situation has marginally improved. The good economic surprises outweigh the bad
ones, although only just. The positive surprises confirm the relative resilience of activity and its ability to rebound as the
confidence shock subsides; the negative surprises give reminders of the fierce headwinds and the downside risks (oil,
unemployment, fiscal austerity,…). Overall, they back up our scenario of positive but weak growth in 2012 (+0.5% as an
annual average). Its engines still stifled by the fiscal consolidation effort, growth is expected to build up a little speed in
2013, to slightly surpass +1%.
Narrow patch
Slightly more good than bad news
Since mid-February, the economic situation has improved marginally. From
lacklustre, the economic situation has become only just satisfactory, with good
surprises slightly outweighing bad surprises. The positive surprises include the
INSEE confidence surveys. After stabilising slightly in February, they posted a
sharp rebound in March (+5 points for households, +4 points for business
sentiment), but this probably merely corrects excessive pessimism and
reflects, with a time lag, the improvement in the PMI surveys between
November and January (chart 2).
These latter disappointed in March following already mixed figures in
February: stability of the services index, at 50.1, and a relapse in the
manufacturing sector, back in contraction territory (at 46.7, from 50). The
composite index therefore declined, from 50.2 to 48.7. For the entire first
quarter, it just reached the threshold of the expansion region (at 50), although
this was progress by comparison with its average level in the fourth quarter of
2011 (48.1). All in all, these various surveys, despite their discordance, lead
us to expect a slight contraction in GDP in the first quarter followed by modest
growth in the second.
The inflation figures for January and February are also among the good
surprises. In January, consumer prices fell 0.4% month-on-month, resulting in
more moderate year-on-year inflation of 2.3%, down from 2.5%, led by a sharp
decline in core inflation, from 1.8% to 1.5%. In February, this decline
continued, as core inflation slowed down further to 1.4%, while headline
inflation remained stable at 2.3%. Inflation is therefore apparently at last
beginning the expected slowdown. This slowdown, though limited, has every
chance of continuing, as downward pressure due to weak demand outweighs
upward pressure due to high commodity prices (chart 4).
Such moderation of inflation is good news for household purchasing power
and thus a supporting factor for personal consumption. This latter is severely
buffeted by the lack of household confidence, tax hikes, expensive gasoline,
rising unemployment, credit slowdown, uncertainties surrounding the election
campaign. The environment is less worrying than a few months ago but is still
not very conducive to spending (chart 3).
The 3% surge in household consumption in goods in February is deceptive,
since it was due to the cold spell in the first two weeks which resulted in
soaring spending on energy (+11.7%) and clothing (+5.7%). This spending will
probably suffer a backlash in March, especially marked since the weather was
much warmer. Moreover, February's growth masks a fall in purchases of
durable goods (-0.7%) and it follows two consecutive months of declining
household spending on goods (-0.4% in January following a similar decline in
December).
The 0.3% growth in industrial production in January, although modest, is the
last of the good news. Its increase was originally based on growth in the
manufacturing sector (0.2%). Year-on-year, it posts a decline which remains
slight (-1.5%) and which could well not go much further, based on business
sentiment surveys.
The labour market continues to concentrate the bad news. The unemployment
rate is rising, slowly but surely. It increased by 0.2 percentage point in the third
quarter of 2011, then by 0.1 percentage point in the fourth quarter. At that
time, it was as high as 9.8%, according to the latest INSEE employment
survey (figures for France as a whole). It has reached the 10% symbolic level
in January and February according to the Eurostat monthly statistics.
According to the INSEE, 22,600 payrolls were destroyed in the fourth quarter
of 2011 in the business sector, a bit less than in the third quarter (-31,500
jobs). We shall have to wait until mid-year, at the earliest, to see any
improvement. The unemployment rate should stabilize a bit below 11% by the
fall (more precisely, at 10.6%) and will remain close to this level in 2013.
A subdued environment
Growth in the fourth quarter of 2011 was confirmed at +0.2%, a performance
that singles out France as an outlier among its European peers and compare
to the Euro zone average (-0.3%). However, the detailed national accounts
shed light on less favourable details (chart 5): stagnation in the purchasing
power of disposable personal income (second quarter of decline per unit of
consumption); very high level of the personal saving rate (just below 17%) and
the financing surplus (close to 7.5%); very low and declining level of corporate
profit margins (just 29%).
The stagnation in purchasing power results from the high inflation rate equal
to the strong 0.8% rise in nominal income. As for the high personal saving
rate, it is the consequence of a very cautious behaviour of households in a
context of rising taxes and unemployment, recorded and expected. Both
elements do of course weigh on personal expenditures.
As for the low level of corporate profit margins, it is constraining non
residential investment. In a low growth environment, efforts to lift it must
focus on controlling production costs, thanks to productivity gains in
particular, which is easier said than done. A limited decline in the personal
saving rate, a small increase in the investment rate, and a partial support
from foreign demand explain the weakness of GDP growth, expected at
+0.5% in 2012 and +1.2% in 2013 as an annual average.
The INSEE, OECD and consensus forecasts all share low growth expectations
but they were also all raised recently. The recessionary period predicted by
INSEE in its December note has not only disappeared from its March
scenario, but the Institute now even forecasts no quarter of contraction. From
zero in the first quarter, growth is expected to reach +0.2% in the second
quarter. At mid-year, the growth carry-over would thus reach +0.5%. Aligning
itself on these figures, the government has revised up its own forecast for
2012, from +0.5% to +0.7%. In its interim March assessment, the OECD now
forecasts a smaller GDP decline in the first quarter (-0.2% QoQ annualised
rate versus -0.5% in November), and slightly more growth in the second
(+0.9% instead of +0.7%). Lastly, in the Consensus Forecasts March survey,
the mean growth rate is +0.2% for 2012 and +0.9% for 2013 (compared with
+0% and +1% respectively a month earlier).
A well-targeted fiscal deficit
Fiscal consolidation has moved forward without too much trouble until now,
but there is still a long way to go. The absence of any fiscal slippage is a good
point, but the absence of tangible progress is less encouraging. The official
public deficit and debt figures for 2011, just published by the INSEE, reveal a
significant reduction in the deficit by 1.9 percentage points, to 5.2% of GDP,
but an increase by 3.5 percentage points in the public debt/GDP ratio to
85.8% (chart 6).
For the third year running, the fiscal deficit has been lower than expected. The
improvement in 2011 is for a large part the result of discretionary fiscal policy
(end of stimulus measures like car scrappage schemes and first effects of the
August and November consolidation plans), since growth (at 1.7%) was close
to potential growth. This decline in the deficit is 40% due to the fall in
government spending as a proportion of GDP (from 56.6% to 55.9%), and
60% due to an increase in revenues (from 49.5% to 50.7% of GDP).
Spending, up 2.1%, increased more slowly than GDP (+3.3% nominal growth)
and at the same pace as inflation (it is therefore stable in volume terms), while
revenues surged 6%.
These positive trends should not make us forget that the deficit is still very
high, whether in total, structural or primary terms (close to 4%). It is still far
from the 3% level that would make it possible to stabilise the public debt/GDP
ratio. The trajectory of this ratio has not yet turned down, even though it is
approaching the critical 90% threshold and interest rates, though low, tend to
be higher than nominal GDP growth (chart 8). France has to rein in its fiscal
deficit, the sooner the better, as debt servicing is becoming heavier (+9.5% in
2011 to EUR 55.5 billion, i.e. 2.8% of GDP).
The government has revised its deficit target for 2012 from 4.5% to 4.4%. Its
growth forecast for 2013, although reduced from 2% to 1.75%, still appears
optimistic. The markets are rightly indulgent with France at present, but there
is no room for error. 2012 remains a high-risk year.
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