2014 was deeply disappointing. The economy did not achieve the hoped-for recovery and unemployment reached a record level despite the increase of subsidized jobs and the massive transfers for companies, so that they could invest and recruit. How does 2015 look like?
France will benefit from a favourable economic environment. The sharp drop in industrial raw materials prices (iron-ore: - 40%, natural rubber: - 30%, textile fibers: - 12%) and in oil prices will lead to a 30 billion euros reduction of its foreign bill. Industrial companies will recover their margins, and households will increase their purchasing power. In the past (1986, 1998 and most recently 2009) the sharp drop in oil prices caused a clear and – in the first two cases – durable economic recovery. Meanwhile, France, as the entire euro zone, will profit from an unprecedented lowering of interest rates. Contrary to all expectations, taken into consideration for tactical purposes in the Public Finance Planning Act, this lowering should last. Indeed, the European Central Bank is even planning to “adjust” its monetary policy, which could mean the adoption of negative rates and the redemption of sovereign debts. The Agence France Trésor has released today the TEC 10 indicator estimating the rates applicable to ten-year bond: 0, 80%. Beating a new record, the short-term notes were issued this morning with negative rates. Moneylenders are paying to lend to France!
This will result in a significant and lasting reduction of the cost of our public debt since the latter is issued at fixed rates. This should also have a positive impact on business costs, provided that the banks pass on this reduction. Public and private investments as well as housing construction should also be stimulated.
Finally, even if one should not be deluded with its consequences, the euro’s decline against the dollar will reduce the pressure of international competition on the productive sector and will support the efforts of the companies exporting outside of the euro zone. But we must keep in mind that more than half of the foreign trade of France takes place in the euro zone, that the location strategies of the firms will not change overnight and, most importantly, that the emerging countries, where prospects for long-term growth are by definition the strongest, have seen their currencies fall against the dollar but also against the euro, as in Brazil and Russia.
The global context seems favourable. The Anglo-Saxon world is in strong recovery, the southern European countries have healed the wounds of the brutal crisis that hit them and China, albeit at a slightly slower pace than in the past, continues its long march forward. So why the euro zone, and France in the first place, are forecasting such a modest rebound (1%) in which no one really believes? Indeed, either this context triggers a shift in the behaviour of economic agents and the recovery might consequently be as strong as in the United States for example, or stagnation continues and it is time to identify deeper causes. At the beginning of this year, it seems that the second hypothesis prevails.
Households continue to hoard money. They limit their purchases and they give up on the idea of buying a home and deposit their money on savings accounts or life insurance placements – for those who have that option and despite the tax pressure. People are in fear of losing their jobs because they know that finding a new one will be very difficult. As for companies, they wait for customers and avoid investing and recruiting. For the moment, no governmental initiative has succeeded in convincing them that France will come out of this vicious circle of stagnation and unemployment. The stated priority given to the reduction of public spending makes them sceptical about the relevance and the efficacy of this policy, especially given the fact that it is precisely public expenditure that has supported so far economic activity, as the latest figures from INSEE have shown. Leading indicators of the economy – for instance, housing construction permits – continue to fall, which means that no improvement should be expected in 2015.
The economic situation suffers from three blows: (1) the new financial and prudential regulations deter institutional investors, such as insurance companies, to put money into the build to rent sector and dissuade banks to lend to first-time buyers. (2) The proliferation of norms has increased the cost of construction and has thereby annihilated the positive effect of lower interest rates. (3) Local political concerns dissuade mayors to issue building permits. They prefer to facilitate the construction of offices in large cities, where the market is tight, and to develop shopping malls in the suburbs. None of the "structural reforms" announced really addressed these blockages. Can 2015 be rescued by the energy and environmental transition, promoted by the Paris Conference and become a green year?
This is unlikely because no one expected the falling fossil fuel prices. It was granted for coal but France, unlike Germany, uses little. For oil, and tomorrow for gas due to the discrepancies in indexation mechanisms, the falling will shift the paradigm on which relies the Energy Policy. The evolution of prices leads the choices made by economic agents. It became obvious in the United States when electricity generation rapidly shifted to gas through the exploitation of shale gas. The decrease of CO2 emissions was spectacular. The State may influence behaviours at the margin with aid. But its action becomes useless if prices change abruptly. France has to face this challenge.
Mechanisms had been implemented or are planned to be by the bill on energy transition towards green growth currently discussed in the Senate. They aim to support the investments that optimize energy consumption or promote, for example, building insulation, smart grids or further aid for low-energy vehicles. People were barely convinced by these mechanisms when the barrel was $ 110, while one predicted further increases due to the predictable resource depletion (sic). These measures will become totally ineffective and consumers’ response will be quick. The fall of gas prices in the United States boosted bigger vehicle sales. The French government has decided to promote the impact of lower prices in order to support purchasing power. Hopes - if not illusions - placed in the green growth will vanish.
Our country produces virtually no CO2 in comparison to "the largest emitters" such as the United States, China and India, and somehow Germany and Canada, who reject two to four times more CO2 emissions than us, per capita. But the predictable noncompliance with the Carbon Emission Reduction Target presented in the bill on energy transition towards green growth will not jeopardize the objectives of the Paris Conference. France will maintain, thanks to nuclear power, its virtuous reputation and all its credit in order to make sure that all countries reach an effective agreement, supported by the United States and China, who have just made a step in this direction.
But restoring confidence in the country will not be enough to put France on a significant growth path, which is a sine qua non for the reduction of unemployment. We have to find something else. Time is short.