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AB 2000 studies

Alain Boublil Blog

 

2018 : the year of France

Anglo-Saxon media enthusiasm about France is good news. It breaks with the pessimistic and even alarmist forecasts of international institutions about the situation of the world economy.  Imbalances and excessive indebtedness of public and private agents are making to fear the worst, especially regarding China. So, 2018 would carry the risk of a new and major international crisis. We should not be surprised. Economists as these major institutions didn’t put us on our guard just before the 2007-2008 crisis and they took a lot of time to understand what was going on. They don’t want to be accused again of incompetence. And if their predictions don’t come true, everybody will have forgotten them. In this rather pessimistic environment, France looks like an exception. Is it justified?

It is indisputable, and the last figures published by INSEE prove it, that the economy is accelerating and production growth is much better than the previous years. But this judgment must be nuanced. Growth was so low that the comparison is biased. After four years of a quasi-stagnation, 2017 GDP growth and probably 2018 one too will be better but reached level is still much lower than the results obtained during rebound periods, like, for instance at the end of the Nineties. That growth is not strong enough to significantly reduce unemployment and the diagnostic based on its acceleration lies, at least partly, on a statistical illusion. Before, judgment about growth level was based on increases by some percentages, 2, 3 or even 4%. Today we are taking arguments about a tenth of a percent 1.2, 1.6 or 1.9% but we must not be wrong. It is rather naïve to believe that national accounting is accurate enough and to be enthusiastic because one year production increased by 1.6% and the following one by 1.9%. That is more a matter of fetishism than of a rigorous analysis. The reasoning is also true regarding opposite situation. To come back from a 1.7% growth rate to 1.4% and to make alarmists conclusions doesn’t make sense. In 2017 and 2018, French growth will be around 2% and it is a significant progress compared with the 2013-2016 period when average growth was around 1%. But this progress is insufficient.

This growth is also unbalanced. The whole economic strategy which was put in application in 2012 was based on the recovery of enterprises competitiveness, affected, by excessive labor costs, as it was then thought. The reduction of these costs, financed by the State, and at the end by taxpayers, was supposed to find again lost market shares both inside and outside the country. The coming back to equilibrium of France trade balance would stimulate activity and employment. Unfortunately facts invalidated expectations of these who inspired that policy. For three years, between 2013 and 2016, when time has been long enough to check if the policy initiated in 2012 produces its impact, trade balance without energy deteriorated until the point that the whole profit France would have taken from the fossil fuels prices fall, was about to be lost. We are going to have in 2017 an unprecedented  excluding energy trade deficit and a global trade deficit near 60 billion euro, about the same than when oil barrel price was above 120 dollars. After four years, the energy bill reduction reached 30 billion euro. The goods trade balance degradation represents almost the same amount. This year, Italy, not to talk about Germany, will enjoy a surplus which will be above 50 billion euro. Foreign trade contribution to growth will be negative in 2017, as it has been in 2016 and nothing allows us to think that the situation will improve in 2018.

At last, growth is increasing inequalities. Social and fiscal measures included in the Finance and Social Security bills for 2018 will not correct the trends which started in 2012. During these five years, Income taxes have increased by 22% when corporate taxes fell by 29%. The salaried purchasing power increase will remain low. Retired who own low-valued assets will be the major losers of that policy and home owners with credits, along with enterprises, will be the main benefactors. Through the renegotiation of their loans, they took advantage of the interest rate fall at a time when the rebound in the property market was giving to their asset a significant increase of its value. Regarding listed companies, they use the reconstitution of their margins in investing a little, in buying back their shares and in increasing dividends paid to their shareholders. Some have even restarted their foreign acquisitions. Lessons from the past have not been learnt. That financial environment has two consequences: households are still anxious about their jobs and their pensions and they are saving with highest on record levels. During 2017 3rd quarter, financial saving rate reached 4.9% of available income and the total saving rate was, with 14.7%, one of the highest in Europe. Especially we must add that, due to repartition pension system, this saving rate doesn’t include the retirement charges they pay, to the difference of countries with a capitalization system through pension funds whose contributions are taken into account in the saving rate calculus.

But the risks, so frequently denounced, regarding excessive indebtedness, will remain very moderate. As far as private agents are concerned, they must be evaluated in taking into account their assets. These ones have increased faster than the related debts. It is significant for homeowners (which proportion is 60% of the population, above the European average) who took advantage both from the increase of the value of their properties and of the rebound of stocks markets. It is less obvious for enterprises where situation is very different according to their past acquisitions financed, or not, by indebtedness. But, as a whole, situation is not alarming, which can be observed in French banks balance sheets which have a low non performing loans ratio. Situation is different regarding the State and public entities. Global indebtedness, even if it is stabilizing, is near 100% of GDP. It is not forecast that it will be significantly reduced in the coming years. But the high financial saving rate of households gives a guarantee again any systemic risk. It is also why France enjoys such a low long term interest rate, roughly 30 basis points above wise countries like Germany and Nederland.

A growth rate which is improving but which is still unbalanced and generating inequalities, it is be the characteristic of the French economy in 2018. It is moving away from the European model and getting closer from the Anglo-Saxon model. It is maybe the reason why these countries media show such an admiration for France.   

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