The French economy is betraying no signs of pre-election nerves.
Bond markets may have been roiled by the prospect of Marine Le Pen as president of the eurozone’s second largest economy but the country’s households and businesses are taking it in their stride. They’ve started the year in bouyant mood, reaping the benefits of a broader uptick in job creation and consumer spending seen across the eurozone in recent months.
France’s latest GDP numbers confirmed the economy grew at a respectable 0.4 per cent quarterly pace the end of last year – the best expansion since the start of 2016 and matching the rate seen in Germany in the last three months to December.
Better still, survey data in 2017 points to an acceleration in activity ahead of the country’s first round presidential vote in late April.
France’s service sector companies, which account for more than three quarters of economic output, reported their best month in three years in February while consumer confidence has leapt to its highest since the depths of the eurozone crisis in June 2011.
The spate of positive news “has been quite surprising”, says Bert Colijn, chief eurozone economist at ING, who notes some similarities in the resilient consumer and business habits seen before the Brexit vote and the election of Donald Trump.
“Hard data for now is trumping political uncertainty” said Mr Colijn.
The economy seems to have finally managed to gather a head of steam following a stuttering recovery in the wake of the financial crisis. Economic output shrunk 3.1 per cent during 2008-09 – a far shallower slowdown than the UK and US. But France’s annual growth has averaged just 1 per cent since 2010.
Unemployment has also dipped below 10 per cent – a totemic figure under the administration of outgoing president Francois Hollande, who vowed to bring joblessness back into single digits during his five years in office.
Frederik Ducrozet, senior economist at Pictet, dubs the current French revival a story of “catch up growth”, with most indicators suggesting France will outperform its main rivals in Germany and Italy at the start of the year.
Amid a broader acceleration in eurozone growth, Mr Ducrozet points to country-specific factors which should help the French economy ride the wave of a cyclical upswing, whatever May’s presidential election brings.
“Finally, the recovery is reaching France”, he says.
“Companies are reporting growing new orders and job creation, while the banking system is on a much more stable footing”.
“France is also the country which has benefited the most from the European Central Bank’s low interest rate and stimulus policies since 2011″ he adds.
Helped along by low inflation and rising employment, consumers are driving the economy – adding 1 percentage point to 2016′s 1.3 per cent annual GDP growth.
But with longer-term trend growth bumping around at just 1 per cent, all three of the country’s main presidential contenders are promising to unleash the economy’s growth potential should they enter the Elysée Palace in three months’ time.
Setting out his economic agenda this weekend, independent candidate Emmanuel Macron has vowed to pursue a Scandinavian-style model that combines generous unemployment benefits with lower corporate tax rates while maintaining a lid on the country’s public finances.
Unlike Ms Le Pen, who wants to rip up the EU’s budgetary framework and leave the eurozone, or the “Thatcherite” Francois Fillon – who is championing bold labour market reforms – the former Socialist economy minister is planning to slash public spending by a more modest 3 per cent of GDP over five years – equivalent to €60bn a year.
“A lot of the technical details of his ambitions have yet to be clarified”, says Gilles Moec at Bank of America Merrill Lynch. “But if well designed, [Mr Macron's] ambitions could benefit potential growth”.
The EU Commission warned earlier this month that the new French president would face an immediate austerity task to avoid falling foul of the bloc’s three per cent deficit ceiling in 2018.
Brussels’ economists think the deficit will widen to 3.1 per cent of GDP from 2.9 per cent this year following the end of a freeze on public sector pay. A persistent flouter of EU rules, France has not fallen below the 3 per cent ceiling since 2007. Mr Macron’s plans entail the deficit falling to 1 per cent by 2022.
Yet of all the looming dangers stalking the economy, Ms Le Pen’s “Frexit” plan to reintroduce a national currency after 18 years of eurozone membership would have the most explosive consequences, say economists.
A unilateral exit would likely unleash short-run turmoil on the economy, including a sharp devaluation in the new franc, surging inflation and rising government borrowing costs. That would be coupled with wider market contagion as to which eurozone member might be next on the way out.
But the political hurdles facing Ms Le Pen’s Frexit plans are not to be sniffed at. The National Front leader will require at least a parliamentary majority to enact the constitutional change required to hold a referendum on eurozone membership.
Even without a Frexit, Ms Le Pen’s economic roster could prove to have a mixed impact on the economy. Her promised spending blitz to revive the country’s industrial heartlands and repatriate jobs in moribund sectors would likely result in a growth and inflation spurt. But a broader lurch towards protectionism could also put paid to some of the more successful attempts to liberalise France’s rigid labour laws in recent years.
These include a 2013 reform introduced by the Hollande government to reduce employer contribution to wage packets. This has proven to be one example of a “supply side” structural change that has come good, notes Hélène Baudchon, economist at BNP Paribas in Paris.
“It is a direct way to reduce the cost of labour and improve profit margins. It is a supportive factor for investment, employment and for exports”, she says.
In the short-run, even without an election, France’s growth prospects could be scuppered by more prosaic factors: rising inflation. Consumer price inflation is expected to peak at a more than four-year high later this year averaging over 1.4 per cent on the back of climbing energy costs. This is likely to put a dampener on consumer spending if wages do not keep up with the rising cost of living.
“Higher inflation means reduced purchasing power gains and this should translate into slower consumption and slower growth”, adds Ms Baudchon.
Any economic hit from the UK’s Brexit vote could also kick in in the later part of the year through reduced export demand for French wares, says Ms Baudchon, who still expects annual growth to accelerate to 1.3 per cent from 1.1 per cent at the start of the year.
“Barring a political accident, the stars are aligned for France” adds Mr Ducrozet.
Image via Reuters
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