French growth: confidence is key

An analysis by Benoît Heitz, Co-Head of macroeconomic and country risk analysis
6 May 2015

After a third consecutive year of virtual stagnation in 2014, with growth at just under 0.5%, the French economy can rely on several supportive factors going for it in 2015.

The ECB's ultra-accommodative monetary policy has significantly eased financing conditions, notably by driving interest rates close to zero; the drop in oil prices is boosting household purchasing power and corporate margins; the depreciation of the euro against the dollar is making French products more competitive; and finally, the temporary measure establishing a 40% top-up on the amortization of certain investments has the potential to stimulate corporate spending.

However, if these positive factors are to pave the way for an economic recovery, confidence is key. Without it, households will save their excess purchasing power and companies will focus predominantly on restoring their deteriorated margins rather than on hiring or investing.

And, on that front, indicators are not showing any distinct improvement. INSEE's business confidence index is still stuck below its long-term average, reflecting the persistence of lackluster conditions. In particular, business surveys in the services and construction sectors do not show optimism. As far as investment is concerned, firm in the manufacturing sector only expect a limited improvement in 2015, with an increase barely above that of 2014.

Overall, economic activity is expected to improve in 2015, but only sluggishly. Companies are liable to be cautious in both their hiring and investment decisions. Household demand should be hampered by the persistently high unemployment rate: the household savings rate is likely to remain high and residential housing investment is expected to stabilize only gradually by 2016 following a three-year decline.