Evaluation countries by COFACE
Slow recovery, restricted by high unemployment rate and lack of competitiveness
Unlike public consumption, household consumption, the traditional French growth support, has only been growing very slowly, held back by rising unemployment (up to an average of 9.9% in metropolitan France in the 3rd quarter 2014) and low level of energy spending. Despite a recent upturn, the INSEE index for household confidence is still at a level well below its long term average. Business investment continues to contract despite credit terms that are more favourable than in most other Eurozone countries. However, companies do not manage to restore their profit margins – which are among the lowest in the Eurozone -, production capacities remain underutilised and business confidence is very low. Housing investment has declined further, contributing to the weakness of the construction sector. As a result of the lack of competitiveness, exports growth does not follow the pace of world trade. There should however be a slight improvement in growth in 2015. Private consumption should benefit from low inflation and a small rise in employment. The pace of foreign sales should pick up thanks to the depreciation of the euro and the strengthening of global demand, while imports acceleration should be limited due to the energy bill reduction. Investment is expected to stabilize in 2015. Labour cost should rise less rapidly but the full impact of theCrédit d’impôt pour la compétitivité et l’emploi (CICE, Competitiveness and Employment Tax Credit) and thePacte de responsabilité et de solidarité (responsibility and solidarity Pact) will only be felt in the medium term. Companies are currently focusing on building their cash reserves or cutting their debts rather than on starting new development projects.
Inflation should remain low because of the limited recovery in domestic demand and the fall in energy costs.
Financially fragile companies and an insolvency rate that remains high
French companies continue to be handicapped by their low profit margins (down to 29.4% in the 2nd quarter 2014) and rate of self-financing (76%). Mainly modest sized and generally not very innovative, they are also underrepresented in the top segment of the range products and export markets, in particular to emerging markets. The number of business insolvencies remains at a high level although it seems to initiate a decline in recent months (63,000 cases in a year at the end of October 2014 compared with just over 64,000 at the end of April 2014). These insolvencies impact on fewer employees but the financial cost borne by the suppliers is slightly rising again due to recent receiverships of intermediate size companies. The construction sector still concentrates the highest number of insolvencies (33% of the total). Other sectors are also experiencing a worsening in their situations, including agri-business and services to individuals (including hotels and catering).
A difficult period of adjustment and a slow reform process
Despite the economy weaknesses and the steady growth of the French public debt, investors have so far remained eager to fund the debt. The 10 year bond interest rate has even fallen below the 1% level. The budget deficit is nevertheless struggling to decline with the weight of public spending remaining one of the highest in the Eurozone (57% of GDP). The country has obtained, in 2013, two additional years from Brussels to return below the 3% limit of GDP in 2015. This objective is not going to be achieved despite the additional measures announced by Paris in response to criticisms from the European Union. It has now been further postponed to 2017.
The government has committed to a reform process, aiming at a supply based policy to overcome the problem of competitiveness. It mainly includes a reduction in companies’ charges, funded by reduced spending. Compagnies should also benefit from a simplification of administrative procedures and the government is considering a draft bill on growth and activity covering in particular Sunday work liberalisation and regulated law professions. However, savings targeted until 2017 (€50 bn) will not be easily achieved. The effective implementation of the announced reforms could well turn out more difficult than expected. In addition, beyond the measures taken to improve competitiveness (CICE,Pacte de solidarité), further efforts could be required by the European Commission to improve the sustainability of public finances and reduce labour market rigidities. The current reforming policy of the government feeds growing dissensions within the socialist majority.