France: Its behavior doesn’t currently react too much to external incentives

The chart below on the French economy is probably the most disturbing and the most worrisome. It shows that France is lagging the Euro Area and that the difference in economic momentum is widening between the two.

The chart is easy to understand. Every month Markit makes surveys. I use the synthetic indices for France and the Euro Area. The scale for each economy is the whole economy taking into account manufacturing and services sectors. Both are consistent with quarterly GDP change in France and in the Euro Area.

The chart just shows the difference between these two indices.

From 2002 to fall 2011 the difference is stable. The French index is above the Euro index. But even if there are large fluctuations the process is mean reverting. There is no persistency in these fluctuations. In other words, on average the French economy looked like the Euro Area economy. The French economy was not a engine nor a drag to Euro growth.

This dynamic is probably changing. Since the end of 2011 the difference between the two indices is growing and it seems that there is no mean reverting process at work. This means that factors that could change economic activity in the Euro Area has no impact on France. If this phenomenon continues then French economy will no longer be the Euro average country.

What could explain this lack of reaction? Is it large uncertainties specific to France that limit companies and households reaction? That’s the question and it started before the last presidential election. It’s then deeper than expected at first sight.

The main issue is that France seems unable to react to foreign improvement. That’s what is really worrying as in the past, recovery came from two catalysts: one was change from inside, kind of structural reform, and the second was impetus from outside. If the French economy is no more able to catch this foreign impulse this means that deep structural reforms have to be voted to change French dynamics. It will take time and before that the question is: what could rapidly help to extend companies’ horizon and invest more. That’s French equation for the coming years.

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