Cash & Investment Management

French Economic Outlook Q1 2017

Wednesday 1st March 2017

Despite possessing one of the world’s top economies, France has been grappling with relatively low growth and stubbornly high unemployment for a number of years. The sluggish performance of the French economy is in sharp contrast to that of its neighbour Germany, which has bounced back strongly since the end of the financial crisis.

Much has been said about rigid labour laws stifling productivity growth and the lingering power of the unions compared to other countries. In an era of global economic liberalisation, this has hindered modernisation and reform measures, becoming a poisoned chalice for any government attempting to tackle the issue. A high tax burden and a generous social security system creates a disincentive to work, whilst an inflexible labour market and rising unit labour costs have resulted in a further loss of competitiveness, primarily to more efficient economies such as Germany, but also to countries that did enact painful structural reforms in the recession that followed the financial crisis. Unemployment remains stubbornly high, with the jobless rate having been at or around 10% for much of Hollande’s tenure (the youth unemployment figure is said to be much higher). Excessive taxation of the wealthy has also been a criticism of the current government, with many leaving the country and therefore depriving the state of crucial tax revenue.

Whilst France has some world class industries, it has accumulated a trade deficit of around EUR 48bn compared to Germany’s trade surplus of approximately EUR 253bn. This has often prompted the debate that some Eurozone members have benefited from the common currency at the expense of others. A recent European Commission report highlighted this, suggesting that the French economy was improving but still had excessive imbalances whilst being critical of Germany’s burgeoning current account surplus which has reached approximately 9% of GDP – far in excess of other export-led nations such as China and South Korea.

Another often cited weakness of the French economy is the size of the state relative to the economy as a whole. At 57% of GDP, France has one of the highest public sector spending ratios in the developed world and is significantly higher than the Eurozone average. Whilst this acted as a cushion during the post financial crisis downturn, it has been a subsequent impediment to growth, with the IMF repeatedly warning that this issue lies at the heart of France’s fiscal problems.

As the world’s leading tourist destination in terms of numbers, there has undoubtedly been an economic cost associated with the numerous terrorist attacks the country has suffered over the past few years and the subsequent reticence of foreign nationals to visit. Tourism has always been an important component of the economy, with the direct contribution of travel and tourism estimated at approximately 3.6% of the country’s Gross Domestic Product (GDP) and the total contribution (direct, indirect and induced) in the region of 9% of GDP. Early indications are that visitor numbers are recovering in 2017, therefore, this should bolster growth going forward.

Political situation

With the soon-to-be departure of Francis Hollande, one of France’s most unpopular leaders in history according to polls, the current political landscape in France is very uncertain. The rise of anti-establishment parties across Europe has unsettled investors and Francois Fillon, the presidential candidate many assumed would beat Marine Le Pen, has been faltering following accusations that he used state funds to pay family members to do fake jobs. Given that Marine Le Pen has talked about restoring the Franc, her presidential bid poses an existential threat to the future of the Euro.

The current uncertainty surrounding the Presidential elections is one of the factors that has caused French Government bond yields to rise recently. The divergence between France’s ten year government bond yield and that of Germany has risen to approximately 0.8%. Given that Germany is essentially the Eurozone ‘risk free’ rate, this suggests that the markets are increasingly nervous about the prospect of a Marine Le Pen victory. However, it should also be noted that there are broader factors at play also, with the potential tapering of quantitative easing by the European Central Bank as growth and inflation both pick up.