France Country Risk Level No reason to be happy yet LOW
Overview After several quarters of economic stagnation, French GDP surprised in Q3 2012 (+0.2% q/q), on the back of an upturn in consumption (+0.2% q/q after three months of stagnation) and buoyant exports (+0.5% q/q after weak performances in previous quarters). Despite this resilience, French growth should end the year on a mixed note (at +0.1%). 2013 promises to be a difficult year in light of the ambitious budgetary adjustment efforts planned by the government: business investment is likely to remain depressed, as is household consumption, while exports are likely to be the only remaining growth driver. In 2014, the recovery is likely to be modest (+1.2%), underpinned by more buoyant exports and investment as the Competitiveness Pact (reductions in employees’ social contributions) announced by the government back in the Fall should start to bear fruit.
Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
Business investment remains depressed. The outlook for industry in the coming two years remains down- beat due to weak demand both at home and abroad. The capacity utiliza- tion rate continues its downward adjustment (at 79% in late 2012 versus 85% for its long-run average), as indus- trials consider their production capac- ity to be more than satisfactory in light of the low level of order books. In this context, insolvencies are expected to increase by +2% in 2013, following an increase of +2% in 2012. Profit margins will continue to be under pressure (at a 25-year low at 28.2% in Q2 2012) due to persistently high production costs and the first-round effects of the fiscal shock.
Household consumption is expected to remain subdued, but not to decline. Households are also likely to be affected by more aggressive taxation in 2013-2014 (hike in taxes, decrease in tax loopholes and an increase in the VAT rate). But it is certainly the ongo- ing crisis – in its sixth consecutive year – that is denting usually resilient French private consumption. The unemployment rate is expected to con- tinue to increase in 2013 and to stabi- lize at a high record of 10.7% in 2014. The stabilization in the number of pub- lic sector jobs and the weak outlook for activity are likely to weigh on employ- ment, which is likely to contract in
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2013. Nevertheless, households could find solace in a savings rate that is still reassuring (at 16.4% in mid-2012) and a moderate level of debt (at 82% of gross disposable income in Q2 2012, compared with nearly 100% on average in the eurozone).
Exports, the only remaining growth driver. The unfavorable global eco- nomic environment and the structural weaknesses facing French companies (depressed export markets, smaller export sector, decline in export market shares, order books at a 10-year low) should continue to curb France’s export performance in both volume and value terms. The trade deficit should therefore remain above EUR 60 billions until 2014. Nevertheless, a cer- tain buoyancy is expected to return from the second half of 2013, once the reductions in social employees’ contri- butions (although relatively minor) take effect and the rate of contraction in demand in the peripheral eurozone countries slows down.
The 3% requirement promises to be difficult. Since last Fall, the Ayrault government has announced a wave of budgetary adjustment measures, par- tially counterbalanced by a boost to competitiveness. While many have called for more ambitious reforms, in particular structural reforms, the asso- ciated social and political risks should
not be ignored. Faced with a tough eco- nomic environment in the eurozone, the singularity of the French choice (Scandinavian-style, i.e. favoring an increase in taxes over public spending cuts) could once again be tested. The resilience of bond yields could thus be undermined in 2013 if potential growth is sacrificed for the sake of an excessively rapid reduction in the fis- cal deficit._AB/LS
To watch…
>The resilience of French consumption. >The evolution of bond yields, at unusual low levels. >A possible revision of the budgetary target in the spring of 2013. >The impact of Competitiveness Pact 1.0 and the possible introduction of version 2.0 in 2014. >The rebound in insolvencies and the increase in non-payment risk for the second consecutive year._