French economic growth is set to step up a pace in 2017 and 2018. It will benefit from a more buoyant world context, which has been visible in the surge in world trade over recent months. It will also be driven by activity in the euro area, which is enjoying a situation that we have not seen for some time. Business trends are picking up across all countries in the zone, even Italy, and business leaders are now much more optimistic than they were a few months ago.
The situation in the Eurozone is also characterized by fiscal policy that has become neutral, and monetary policy that is set to remain accommodative for a while to come. This means that for such times as inflation stays well below the ECB’s 2% target, the central bank will not change its monetary approach. To add to this, oil prices are not expected to rise sharply, so long-term rates will still stay very low. This overall context promotes risk-taking and encourages investment.
Against this more buoyant backdrop, two other factors will help drive this uptrend, while also making it more sustainable: corporate investment and the real estate market.
Corporate investment has been more robust over recent months, and this can be seen in quarterly figures published in national accounts. Companies enjoy a more positive and more assured outlook on their environment and their ability to make projections on the future: in other words, the uncertain context faced by both the Eurozone and France hampered investment. Uncertainty makes the economic outlook less predictable and restricts risk-taking.
This environment has changed in the euro area and France, as fiscal policies are more neutral and uncertainty on tax measures that until recently cast a shadow over the future has disappeared.
In France in particular, companies have enjoyed margin improvements as a result of the implementation of the CICE competitiveness and jobs tax credit system and of the Responsibility Pact. Margins had fallen much more in France than in competitor countries since 2008, thereby denting the country’s companies. The CICE tax credit initiative has helped redress the balance, although margins have not yet returned to pre-2007 levels.
Looking beyond figures in France, we are also witnessing an uptrend in investment more broadly speaking across all countries in the euro area, in keeping with the cyclical improvement in the zone.
This is set to trigger positive collective momentum, which will also involve France. From a more technical standpoint, the increase in capital goods orders is spectacular, as reported by INSEE in its monthly surveys, with figures returning to pre-crisis levels. We are witnessing solid momentum, which is even being borne out in the second quarter after the end of the French higher depreciation allowance scheme. This is a very good sign and shows that this expansion was not only due to tax relief measures, which were useful but are less so now that growth is picking up again.
The other point worth noting is that these efforts will also benefit from public investment. The new French president’s program includes renewed public investment, which is a key point as this type of investment provided real impetus in the past, while also shoring up private investment considerably.
In other words, expected investment momentum over the months ahead will help drive up potential growth, thereby making the French economy more self-sustaining.
The other important point is the recovery on the real estate market. The more robust economic cycle and ongoing low interest rates (which are set to remain low for quite some time), have led to an acceleration in building permits and new housing starts. This trend should continue with the sustained economic cycle and as the ECB has no intention of changing its monetary policy. Optimism in France is also reflected by the recovery in the number of sales, particularly of new homes, which is then visible in the decrease in inventories of new houses and flats for sale.
There is every reason to expect an improvement in the real estate sector: the economic horizon is extending due to the upturn in the economic cycle and in the job market, interest rates are low, inventories of homes on the market are falling. So current moderate housing prices should be pushed upwards. The ratio of real estate price to household revenue has been on a downtrend, although the figure is still slightly higher than in other countries.
The real estate market is also set to bolster French growth over the months ahead, provided that the government does not create too much uncertainty on the sector.
The French economy is poised to benefit from stronger economic and job market growth trends, and the new president will need these if he is to push through labor market reforms. His challenge will be to give France the wherewithal to achieve more self-sustaining growth that also makes a greater contribution to the euro area.
This is my weekly column for Forbes.fr in French see here