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Marcuard’s Market update by GaveKal Dragonomics
By François-Xavier Chauchat
As a Frenchman visiting Italy last month, I had the strong sense that for the first time in decades France was lagging its transalpine neighbour. Italian business and consumer confidence has picked-up over the last two years, and unemployment has declined for four straight quarters.
France, by contrast, is the only European country that saw rising unemployment during 2015. Political confidence has evaporated as reinforced by the recent rather desperate tactical voting to deny the National Front party victories in regional elections. And as if that was not enough, the Paris attacks are expected to cut -0.1% from French GDP this year.
And yet despite these headwinds, France displays pockets of economic strength. The impact of easing by the European Central Bank has been to spur a 4% YoY rise in consumer credit, while loans to domestic firms are up 3.7%. An improved credit cycle has been aided by non-bank institutions such as insurance companies reaching-for-yield and moving toward direct financing activity. Also, the lower euro and a reduced payroll levy since 2013 has helped industrial profit margins hit a post-2007 high, reflecting a near 3pp rise since mid-2014. These were the arguments which I broadly made back in June.
This begs the question, why does French growth and employment still lag? The standard explanation is a lack of structural reforms. That may be so, but it does not explain the last two years cyclical weakness. The more straightforward explanation is that France’s construction sector is in a depression, with investment having fallen -20% in real terms since 2008; declines have accelerated since 2013 (see chart).
Excluding construction, GDP growth would have hit 1.7% YoY in 3Q15, instead of 1.2%. The sector now accounts for a quarter of corporate bankruptcies, while lay-offs in 3Q rose by 5%. By contrast, most eurozone countries are now adding construction jobs. Given the labor-intensive nature of the sector, it is probably not surprising that French unemployment is so intractable a problem.
France’s construction depression has been aggravated by policy mistakes — including increased environmental and social regulation — that are now being corrected. The government is also supporting first-time home buyers with a loan guarantee scheme that offers zero interest finance — the so called pret a taux zero.
The scope of the PTZ will be substantially extended in January to include purchases of existing homes and flats on the condition that buyers spend a sum equivalent to at least 25% of the purchase price on refurbishment.
Such zero-cost finance will cover up to 40% of the purchase price, up from 20% previously. Also, eligible buyers can opt for a 5-year grace period on the repayment of the principal. These measures will significantly boost the purchasing power of first-time buyers as the PTZ can be used as a down-payment, against which a bank loan can be raised. The cost of the program to the public purse is about EUR 2 bln.
If the new PTZ, associated with record low mortgage rates, is able stop the bleed — as did the UK’s “Help to Buy” scheme since 2013 — then, by 2017, French employment should gradually improve to levels prevailing in the rest of Europe. The probability of this scenario is still hard to assess, but it is encouraging that the government now understands the importance of the construction sector, and seems willing to admit that its own policies proved to be highly destructive.
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