France – GDP growth at 1.9% in 2017

The French GDP growth in 2017 has accelerated to 1.9% on average after 1.1% in 2016. The quarterly sequence of the GDP expansion was steady at 0.6% per quarter except 0.5% in the third quarter.
The carryover growth for 2018 at the end of 2017 is 0.9% which slightly higher than a year ago. At the end of 2016 it was at 0.4% for 2017. The effort that has to be done to converge to 2% in 2018 on average will be lower than in 2017. It is just a 0.42% increase per quarter (versus 0.58% in 2017).
The very positive part of the fourth quarter report was the strength of corporate investment.

The government budget for 2018 has been defined with a 1.7% growth (or 0.33% per quarter). This means that we can expect higher receipts compared to what was forecasted. The government credibility will be measured by its ability to use these extra receipts to reduce expenditures not to increase them. In the past these type of temporary receipts were systematically spent in permanent expenditures leading to a persistent budget deficit. We can expect a different strategy from the president Macron.

A reduction in expenditures and therefore lower demand would be consistent with what we currently perceive on the business cycle. A recent survey has shown that it was quite impossible for companies to increase their production. The production capacity utilization rate is at a peak, production bottlenecks are growing and there are difficulties in hiring.
With these constraints in mind, a boost in demand through higher government expenditures would be a mistake. The target is to reduce these constraints through incentives on investment (through public investment) and education. That will be the main government task in 2018.

The graph below shows that the current growth trend is slightly lower than before the 2008 crisis. It means that there will be no catching up and that the cost of the crisis is permanent. The gap between the current GDP level and the trend from 2000 to 2008 is -8%. The GDP level would have been 8% higher without the crisis. This is quite big and this gap will widen in coming years as I do not expect a catchup of growth.
FR-2017-Q4-GDPTrend.png

The Economic Cycle in France and French Economic Policy

Growth in France is set to come to 1.8% in 2017 and 1.7% in 2018. From today’s standpoint, these figures look high as trend growth for the French economy came to slightly more than 1.1% on a yearly basis between 2013 and the third quarter of 2017, making 2017 and 2018 look like good vintages. However, a comparison with the pre-crisis period is harsh. Trend growth for the French economy stood at 1.8% over the period between 2000 and 2008 and could go well beyond this figure, which equates to the cycle peak in today’s economy.
The extent of the economic cycle provided leeway for all concerned as growth could go well beyond this trend, e.g. coming out at 4% in 2000. French economic policy at the time did not generally view this cycle peak as an opportunity to adopt a more restrictive strategy, and France as a whole was unable to reduce imbalances when growth was strong, particularly from a budgetary standpoint. The French budget “funding pot” concept, invented during periods of vigorous growth, was used to justify all sorts of spending on the back of higher budget revenues. Continue reading

The French economic cycle and economic policy ahead of the elections

This is my weekly column for http://www.forbes.fr.  Here You can find the original in French

Since the financial crisis in 2008, trend growth has slowed down sharply across western countries.
The chart below tracks 10-year average annual growth in the US and France since 1960. In the 1960s and 1970s, French growth was very robust and considerably outstripped figures in the US, as France enjoyed a phase of catching up on growth as compared to the United States. In the mid-70s, this “catch-up” momentum came to a halt, productivity gains declined and growth slowed sharply to reach a steady trend of around 2%. US growth was slightly higher on average and displayed a more stable pace with a trajectory of around 3% until 2007.
Comp-France-USA-LT-Growth10a
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Growth Comparison between the US and the Euro Area – The difference is not so important

We can first compare the situation at the beginning of 2015 with the level of activity recorded in the first half of 2008. Taking this period as a reference before the break associated with the Lehman crisis, the United-States are significantly doing better than the Eurozone. The former have a GDP which higher by 9% compared to the reference period, while the euro zone is still contracting by -1.3%. There is no doubt the US has done significantly better than the Euro Area. This is what the first graph shows. Continue reading