Three economists from BSI Economics (a banking strategist, an institutional investor, and a central bank economist) discussed issues related to French economic policy and the global macroeconomic environment on Thursday, June 29, 2017.
While the current favorable economic momentum in France and Europe is expected to continue, a decline in confidence in the second half of 2017 could slow growth and have a significant impact on economic activity.
September 2017 is therefore likely to be a decisive month, with high expectations for labor market reform in France and key measures that will have to take into account limited budgetary leeway (abolition of the housing tax for 80% of households, reduction of the tax burden on businesses, and reform of capital taxation). In this sense, labor market reform, which is generating very high expectations and could cause social tensions at the start of the new school year, and the French economy’s ability to bring down the unemployment rate on a lasting basis, appear to be challenges that could determine the course of reforms over the next five years. Success could have a knock-on effect, while disappointment could crystallize tensions in the long term.
1 – French economic situation
The French economy is enjoying strong momentum, with GDP growth revised upward to 0.5% in the first quarter of 2017. Surveys (PMI, household confidence surveys, etc.) are well above their long-term average, and growth forecasts for 2017 indicate that the French economy could grow by between 1.4% (Banque de France, European Commission) and 1.6% (INSEE Economic Outlook). This would be the highest since 2011, exceeding its potential.
Growth factors are expected to rebalance, with domestic demand (consumption and investment) more subdued but still dynamic, and foreign trade less depressed. In particular, the sectoral economic phenomena that penalized exports in 2016 (delivery problems in the aeronautics industry, the worst grain harvests in 40 years, and a decline in tourism following the terrorist attacks) are expected to fade in 2017 (although the heatwave in June could have a negative impact on French harvests).
2 – Financial market environment and euro-dollar exchange rate
Three main issues have been the focus of attention on the financial markets.
- The low volatility environment observed in financial markets in the first half of 2017 could quickly be called into question due to uncertainties surrounding political promises in many developed economies, as well as the difficulties central banks are having in communicating their various monetary policy exit strategies and their position on this issue. The overreaction of market participants to announcements by Janet Yellen and Mario Draghi highlights the scale of the task facing central bankers in communicating their plans for a gradual normalization of interest rates.
- The prolonged weakness of oil prices and the appreciation of the euro could weigh more heavily on inflation expectations (total and core inflation), contributing to the end of Trump Reflation (already widely observed in the US) and a tactical repositioning of portfolios, notably with a correction on US equity markets.
- Finally, market operators’ overreaction to Mario Draghi’s recent comments (in his speech in Sintra on June 27, where for the first time the ECB president mentioned « reflationary forces » in a speech that was nevertheless largely accommodative, and had to be clarified the following day) supported an appreciation of the euro against the dollar. This resurgence of the euro is likely to affect exporting companies between now and the end of the year. However, on the one hand, the US dollar accounts for only 7% of France’s foreign trade, and on the other hand, the ECB’s forecasts assume a euro exchange rate of 1.12 against the dollar for 2017 (currently 1.14). These two factors would justify a more limited impact of the euro’s appreciation on French economic activity, whose sensitivity to exchange rates must always be approached with caution.
