Economic Conditions in France Prospects for 2014-2015

Hervé LE BIHAN

Banque de France

EUI nomic Workshop

April 2014

1

Overview

Outline

• Short -term outlook

• The fiscal context

• Prospects for the components of demand

• Inflation

• Summary of recent forecasts

2

Short-term outlook

• Mild recovery is under way

• GDP just reached its 2008 level

3

95

96

97

98

99

100

101

95

96

97

98

99

100

101

2007 2008 2009 2010 2011 2012 2013

GDP (Index, 2008q1=100)

Short-term outlook

• Surveys point to picking-up of activity

• Latest BdF short-run forecast for GDP in 2014 Q1: +0.2% (q-o-q)

4

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

2010 2011 2012 2013 2014

INSEE Personal production expectations

BDF Production expectations

PMI New orders

Production expectations in INSEE, BDF and PMI manufacturing surveys

(standardized data)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2010 2011 2012 2013 2014

INSEE BDF PMI

France: Business climate indicators in industry(standardized data)

• Caveats: Prospects are gloomy for residential investment over the several quarters ahead

• Low consumption growth expected in Q1 following spike in Q4 driven by temporary factors

The Fiscal Challenge

5

• Government Deficit 2013 (EDP notification ) : 4.3% of GDP

• Some consolidation through higher taxes in 2012 and 2013

• Tax receipts disappointing in 2013

• So far curbing of expenditure/GDP ratio not started

2010 2011 2012 2013

Total receipts 49.5 50.7 51.8 52.8

Total expenditures 56.6 55.9 56.7 57.1

Balance –7.0 –5.2 –4.9 –4.3

Fiscal Developments (% of GDP)

The Fiscal Outlook

6

• Two main goals of current fiscal policy

Spur competitiveness of the French economy Fiscal consolidation

• On competitiveness side, strategy in place since 2013-2014 the CICE €20bn targeted cut in labor cost (Corporate Tax Credit) – gradually implemented Financed by VAT increase, spending decreases. • New Government appointed 31 March

• Details on fiscal plans just released on 23 April: Stability Program for 2014-2017

The Fiscal Challenge

7

• Details on fiscal plans just released on 23 April: Stability Program for 2014-2017

• Includes the ‘Responsibility and Solidarity Pact’ further cuts in social contributions (€10bn)- targeted towards wages <3.5 SMIC. employee social contribution (cut €5bn )

• Plus: overall consolidation through spending restrictions. Among anouncements: local government spending, health insurance, freezing of social benefits and civil servant general wage increases. Amounting to €50 bn (2.5% of GDP) at horizon 2017. Public spending planned to be nearly frozen in volume

• Main issues: Will spending restrictions fully materialize? Will response of private investment and employment offset adverse effect of

consolidation?

Components of aggregate demand: consumption

• Household Saving Ratio, relatively high and stable since the crisis.

8

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Saving ratio

Components of aggregate demand: corporate investment

Conflicting factors Real interest rates are historically low, uncertainty has arguably diminished NFC margin rate at historical low. Corporate Debt at historical high

9

27

28

29

30

31

32

33

27

28

29

30

31

32

33

00 01 02 03 04 05 06 07 08 09 10 11 12 13

NFC Margin rate (%)

• CICE and Responsibility Pact aim to restore investment through profit margin improvement

16.4

16.8

17.2

17.6

18.0

18.4

18.8

19.2

16.4

16.8

17.2

17.6

18.0

18.4

18.8

19.2

2005 2006 2007 2008 2009 2010 2011 2012 2013

Corporate Investment/Value Added ratio (%)

Corporate Investment/Value Added ratio NFC margin rate

Trade

• Export performance : some recent flattening

• After protracted loss in market share.

10

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Export performance

(ratio of export to world demand)

Low Inflation

11

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014

HICP InflationHICP Core inflation

Inflation (%, yoy)

Low Inflation

12

-10

-8

-6

-4

-2

0

2

4

6

8

-10

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013

Import DeflatorValue-Added Deflator

Import and Value Added deflators (%, y-o-y)

Wages

13

-1

0

1

2

3

4

-1

0

1

2

3

4

2005 2006 2007 2008 2009 2010 2011 2012 2013

Base wageAverage per head wage

Inflation (HICP)

Nominal Wages (yoy %)

March 2014 Low inflation surprise

14

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2 M3

2013 2014

HICP InflationHICP Core inflation

Inflation (%, yoy)

VAT increase

in Jan 2014

• March low inflation outcome: mild climate conditions & unprocessed food; rebates in cars

• But also pass-throuh of VAT seems over (reflecting the tax Credit?)

Some recent forecast

• Some Forecasts

15

GDP ( %)

Gov. Balance (% GDP)

Inflation (%)

2014 2015 2014 2015 2014 2015

EC (Winter Forecast) 1.0 1.7 -4.0 -3.9 1.2 1.2

IMF 1.0 1.5 -3.7 -3.0 1.0 1.2

OECD 1.0 1.6 -3.7 -3.0 1.2 1.2

Government (Stab Prog.) 1.0 1.7 -3.8 -3.0 1.2 1.5

Consensus Fcast (April 14) 0.9 1.3 - - 1.0 1.3

Some recent forecasts

• GDP growth forecast dispersion

16

2014

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3 CF (max)*

CF (min)*

Consensus Forecast mean(0.86)

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Programme de stabilité 2014-2015 (1.0)

0.8

1.0

1.2

1.4

1.6

1.8 CF (max)*

CF (min)*

Consensus Forecast mean (1.25)

0.8

1.0

1.2

1.4

1.6

1.8

Programme de stabilité 2014-2015 (1.7)

2015

17

Appendix

National Accounts Q4

18

2012 2013 MOYENNE Acquis GLISSEMENT

ANNUELLE fin ANNUEL AU T4

I II III IV I II III IV 2011 2012 2013 2013T4 2011 2012 2013

OFFRE ET DEMANDE

Produit intérieur brut 0.1 -0.3 0.2 -0.2 0.0 0.6 -0.1 0.3 2.0 0.0 0.3 0.3 1.5 -0.3 0.8

Importations 0.7 0.2 0.0 -1.2 -0.1 1.4 0.9 0.7 5.3 -0.9 0.8 1.3 1.0 -0.3 3.0

Exportations 0.4 0.4 0.4 -0.8 -0.5 2.3 -1.1 1.3 5.6 2.5 0.8 1.0 5.1 0.3 2.1

Consommation des ménages 0.5 -0.6 0.1 0.0 0.1 0.3 0.0 0.4 0.5 -0.4 0.3 0.4 -0.7 0.0 0.8

Consommation des APU 0.6 0.4 0.4 0.4 0.4 0.7 0.3 0.5 0.5 1.4 1.8 0.7 0.5 1.8 1.8

Investissement total -1.2 -0.3 -0.6 -0.9 -0.7 -0.3 -0.3 0.5 3.0 -1.2 -2.1 0.1 2.6 -3.0 -0.9

dont : Investissement des SNF-EI -1.5 -0.5 -0.9 -1.1 -0.9 -0.1 -0.3 0.9 3.1 -1.9 -2.3 0.5 1.9 -3.9 -0.4

Investissement des ménages -0.7 0.0 -0.5 -1.0 -1.3 -1.5 -0.7 -0.4 2.3 -0.4 -3.8 -1.1 1.8 -2.1 -3.9

Investissement des APU -1.0 0.2 -0.1 -0.4 0.5 1.0 0.4 1.0 0.3 -0.6 1.4 1.2 3.0 -1.3 2.8

Demande intérieure totale 0.2 -0.4 0.1 -0.4 0.1 0.4 0.5 0.2 2.0 -0.9 0.3 0.5 0.4 -0.5 1.1

19

92

94

96

98

100

102

104

106

92

94

96

98

100

102

104

106

2009 2010 2011 2012 2013 2014

IPI in manufacturing (monthly, 2010=100)

IPI in manufacturing (quarterly average, 2010=100)

IPI in manufacturing in Q1 (carry-over after February)

Evolution of manufacturing production

92

94

96

98

100

102

104

106

92

94

96

98

100

102

104

106

2009 2010 2011 2012 2013 2014

IPI in manufacturing (monthly, 2010=100)

IPI in manufacturing (quarterly average, 2010=100)

IPI in manufacturing in Q1 (carry-over after February)

Evolution of manufacturing production

Housing starts and HH investment

20

14

16

18

20

22

24

26

300

400

500

600

2002 2004 2006 2008 2010 2012 2014

Housing starts (number of dwellingsx12, sa, RHS)

Housing starts, 12 month average (number of dwellingsx12, sa, RHS)

Houshold investment in construction (M€, LHS)

Housing starts, February (x12) : 275 796

Housing starts, 12 m average, February (x 12) : 327 932

Houshold investment in construction, Q4 2013 : 16 484

21

Unemployment Rate

22

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13

TXCHO_BIT