It’s a rare week when there are two positive economic data points coming out of France.
This week was like Christmas — there were three positive bits of news from the eurozone’s second-biggest economy:
- With a rise of 3.7% year-on-year, French retail sales were stronger than Germany, Italy, Spain or the United Kingdom’s in August.
- Every major European services PMI (a prominent business survey) came in below expectations for September — except France’s.
- Industrial output figures released on Friday showed a 1.6% rise month-on-month in August, and manufacturing production rose by 2.2%. Those are the strongest reading for more than two years.
So what does this mean for France?
The country has been a constant disappointment during the recovery period for Europe. Germany performed better than France consistently, even through the euro crisis years.
The UK was similarly stagnant to France up until late 2012, but it’s since set off on a different trajectory, accelerating away. The French recovery has been pretty muted.
Nobody should be popping champagne yet. It’s too early to say whether anything more substantive will come out of France in the rest of the year.
Insee, the French statistical agency, noted this month that the economy has been recovering “in fits and starts.” It wouldn’t be unusual based on the last few years for this week’s encouraging data to turn disappointing again.
But even though there have been false dawns before, there’s some good news for 2016 and onwards — for starters, the country’s austerity programme is going to ease off. France is edging closer to the European Commission’s 3% deficit limit, and once it gets there, the government will likely be in no rush to balance the books further.
Here’s a chart from Oxford Economics, showing the effect of fiscal restraint falling off:
It’s not just fiscal policy, either. The European Central Bank is now likely to remain supportive for an extended period of time. It may even boost or extend the quantitative easing programme it began in January. ECB chief Mario Draghi shows no signs of giving up on his easing policies or choosing a disastrous rate hike like his predecessor Jean-Claude Trichet did in 2011.
And Oxford Economics’ Marion Amiot also sees private investment picking up from next year, according to a recent note:
Similar to other Eurozone countries, the latest drop in oil prices and the ongoing fall in commodity prices are helping to improve French firms’ cash positions. In addition, recent government measures to help companies margins (i.e. the tax credit for competitiveness and employment and the responsibility pact) have recently kicked in and will continue to have a positive effect until 2017.
France’s reform process includes the Macron Law brought in by economy minister Emmanuel Macron earlier this year — the Wall Street Journal has an excellent primer on it here. It’s a bundle of liberalisations in different areas, like Sunday trading, labour tribunals and transport.
The effect of those sorts of reforms is lagging, so nobody should expect an immediate change. But the OECD suggests the law alone should boost growth by 0.3% over 5 years. That’s small beer, but indicates what a more comprehensive reform effort could do. IMF chief Christine Lagarde is already talking about a second Macron Law.
France has had a meagre recovery so far, and in comparison to Spain, it’s been a very late reformer too. But don’t be surprised if you start to read about France’s shock improvement over the next year.