- With the UK still dealing with Brexit uncertainty, Germany approaching a technical recession, stagnation in Italy, and a halving of Spanish growth (since 2017), the French story remains a positive one.
- The French economy has been growing at a rate of either 0.3% or 0.4% q-o-q since the middle of 2018.
- So why has France outperformed, and will it continue to do so?
Despite other euro area countries facing falling growth, economic stagnation and even recession over the past two years, France’s economy has continued to grow. Although growth isn’t at a level you would typically write home about, when compared to the rest of the euro area it’s impressive.
How has France achieved this?
There are three main factors that have contributed to France’s continued growth over the past two years.
First, France’s annual industrial production growth has been positive so far this year increasing 0.7% - this compares with negative performances in the three other largest European economies of Germany, Italy, and the UK. This strong performance can at least partly be attributed to lower exposure to the vagaries of global trade, particularly Chinese trade, than some other European economies.
Second, France has benefited from both loose monetary policy and has lower household debt than Germany, Italy or Spain, and a “refocus” of President Macron’s fiscal policy in response to the Gilets Jaunes protests earlier in the year. As the European Commission has noted:
“Fiscal measures should provide further support to purchasing power over 2019, especially for vulnerable households with a high marginal propensity to consume”
The third and final driver has been President Macron’s labour market reforms. Despite being historically high, the French unemployment rate has fallen (albeit slowly) to 8.5%. And while total employment is not growing particularly strongly, full-time jobs – which the President’s reforms have targeted by reforming taxes, benefits, unfair dismissal costs, and temporary contracts – are growing at a rate of some 1.5% y-o-y, much faster than is the case in Germany (0.4%) or Italy (flat). This has come at the cost of part-time employment, which is falling at an annual rate of 5% (in Germany, Italy, and Spain part-time jobs are growing at an annual rate of between 2% and 3%). There is still much work to be done. However, with further reforms planned for the remainder of Mr. Macron’s presidency, it is fair to be optimistic. But this is reliant on whether he has the political capital to introduce them – which is questionable.
Can the French economy continue to grow?
Looking ahead there are positives and negatives to France’s recent economic prosperity. On the downside, global macroeconomic uncertainty may end up denting a key support to the French economy, that of fixed capital investment, which has been growing at an annual pace of 3-3.5% so far this year. And while a hard Brexit would prove harmful to France, it could be worse for other countries such as Germany and, to a lesser extent, Spain where exports to the UK make up a larger portion of GDP.
In saying that there does seem to be more positives than negatives to support the continuing French economic growth:
- Firstly, the French Budget last month announced further cuts to household taxation in 2020, including income taxes and to taxes on housing.
- Recent economic surveys (such as the INSEE) report a notable rise in consumer confidence, likely leading to increased consumer spending.
- Finally, at nearly 15%, France’s household saving rate is above its average (unlike in Italy or Spain, for example) which could help insulate consumer spending even further in the event of a future downturn.
In short, these factors may justify a consensus forecast profile for French GDP looking generally more optimistic than for other major European economies.
For more information read our full report on ‘Why is France Outperforming?’
Chief UK & Euro Area Economist
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