France: recharging the engine

France is the second-largest economy in the eurozone after Germany and a major driving force in the European Union (EU). The country is slowly recovering from a stagnant economic period between 2012-14 posting growth of 1.2% in 2015 and expected growth of 1.3% last year, with the same again predicted for 2017, according to the International Monetary Fund’s (IMF) latest ‘World Economic Outlook’ report.

The Paris-based Organisation for Economic Co-operation and Development’s (OECD) Economic Forecast released last November largely agrees, predicting gross domestic product (GDP) growth will edge up to 1.6% by 2018, as tax cuts and faster job growth support stronger private consumption.

Business investment should also pick up says the OECD, helped by tax reductions and ongoing low interest rates. High unemployment is expected to fall from 9.9% to 9.7% in 2017 and continue downwards thanks to lower social security contributions, hiring subsidies and significant upscaling of the training options available to jobseekers.

Structural labour reforms introduced in 2015 under the so-called ‘Macron’ and ‘Rebsamen’ laws – named after former minister of the economy turned presidential candidate Emmanuel Macron and ex-social affairs minister François Rebsamen – aim to address the ‘dual’ job market and other rigidities. These protect existing workers and high wages, living standards and benefits, but are blamed by some for high youth unemployment and de facto reduced labour terms for youngsters.

France’s inflation rate will remain low, adds the OECD, as slack persists. High government borrowing is expected to slowly fall, but corporate tax rates currently stand at a relatively high 33.33%.

“France has been lagging a bit behind the eurozone in recent years,” says William De Vijlder, group chief economist at BNP Paribas. “Our figures for last year show 1.7% growth for the eurozone and only 1.1% for France, but we are predicting this differential will disappear in 2018 with both the domestic and the wider eurozone economy expected to grow by 1.5%.”

De Vijlder puts the economic improvement in France down to an upgrade in the property market, which “had been a drag” and better corporate profits, which has released investment in jobs, equipment and so on. “The 2015 Macron reforms also had a positive impact, although it is important to state that various measures were included – not the least being a relaxation in Sunday opening hours for shops,” he says. This has particularly helped tourist spending in Paris and other major cities, which suffered in the wake of major terrorist attacks in 2015.

“The labour reform elements will take longer to feed through and some have already been scaled back. The macro affect shouldn’t be exaggerated yet,” cautions De Vijlder. “It is an aggregation of small factors that has led France back to growth, not a single measure. The investment environment is also favourable with low interest rates.”

According to Maria Malas-Mroueh, a director in Fitch Ratings’ sovereign team, the credit rating agency’s (CRA) latest report on France gives it an ‘AA’ rating, which it has maintained since a downgrade from the top ‘AAA’ in mid-2013. The outlook is stable. “Growth over the recent past has been modest,” she says, “particularly relative to some of France’s AA-rated peers. This modest recovery will nevertheless continue in 2017 and 2018, supported by domestic demand which, in turn, will be underpinned by the gradual labour market recovery.”

Malas-Mroueh also predicts “the acceleration of investment that has taken place over the past few quarters will continue into 2018.” This will be aided by “still improving profitability in the corporate sector, supportive fiscal measures, and ultra-loose monetary policy.”

A crucial election

“It is a critical year for France. Indeed, 2017 is a critical year for the EU and the continent as we’ve still got French and German elections,” says Francois Masquelier, speaking in his capacity as chair of the Association of Corporate Treasurers of Luxembourg (ATEL). He is also a member of the European Association of Corporate Treasurers (EACT).

The challenge of regenerating economies and job creation after the eurozone crisis and the need for unity after the Brexit vote are evident in France, as they are elsewhere across Europe. “The elections bring an added element of risk,” says Masquelier, who worries about a weakening of the axis between France, the ever-stronger Germany and the trio of Benelux countries – the original founders of the European project.

“They have historically been the driving force behind European integration and harmonisation,” he says, while pointing out they potentially face a threat from populist insurgents such as Marine Le Pen, head of France’s far right Front National (FN) and Geert Wilders, a Dutch politician who is the founder and leader of the Party for Freedom. These figures often reject present EU policies – sometimes the institution itself, threatening its future – globalisation and unquestioning support for the Euro single currency zone.

“European treasurers don’t want to return to having to deal with various currencies, or to see the abandonment of EU tax harmonisation plans,” says Masquelier. “My concern as a European treasurer is to remain competitive, ensure a level playing field and keep our regional centres where they are. I also want to plan with certainty, but that is hard at the moment.”

Domestic political concerns

FN’s Marine Le Pen has already stated a desire to take back control of France’s borders, economic, monetary and law-making powers, prompting wild fears of a ‘Frexit’ or at least an exit from the euro in the unlikely event that she wins this May’s presidential election. According to media reports, she told an Anglo-American Press Association of Paris briefing in January that: “My objective is to take back sovereignty”.

The centrist candidate Emmanuel Macron, a former banker and the ex-minister of the economy responsible for pushing through the business-friendly reforms, is currently riding high in the polls as another more orthodox self-styled ‘independent’ fronting the En Marche! organisation. He, Le Pen, or the original frontrunner Francois Fillon of the conservative Les Republicains – who has had to apologise over payments made to family members for parliamentary work – are the current favourites to make the two-person presidential run-off on May 7, assuming no-one wins the first round of voting outright two weeks before that.

Benoît Hamon will stand for the Socialist Party (PS), after the unpopular existing president Hollande confirmed he won’t be standing for them in the election. Other candidates are available.

“A major change will happen in France either way after the presidential election,” says Masquelier, citing the popularity of figures like Macon and Le Pen, which aren’t aligned to the traditional right or left parties. Change is expected due to the frontrunner’s plans to introduce further labour, retirement, EU or other reforms to stimulate growth and pay down sovereign debt.

The candidates’ proposals, which may run into union opposition, would represent a break from France’s settled orthodoxy.

Europe-wide headwinds

“It’s impossible to say how the French election will play out – and I’m certainly not saying – but it does create uncertainty,” says Masquelier. “Uncertainty is not ideal in a big and important country such as France.”

This domestic uncertainty is exacerbated by wider EU worries about maintaining the euro after the prolonged Greek sovereign debt crisis, last December’s loss of the Italian constitutional reform referendum vote and ex-prime minister Renzi, and instability in other trading partners.

De Vijlder, sees similar headwinds but he is careful to say that “as an economist it is not my role to comment on elections.” However, he does cite Brexit as a further concern. “Seven percent of French exports go to the UK and there is the uncertainty element post-Brexit,” he says. “The fear is that corporates in the UK may invest less, hitting French exports and wider EU growth – a situation exacerbated if the pound remains low.”

Post-Brexit, multinationals may decide to invest more in the EU than the UK over the longer-term in order to stay in the single market, which would benefit France and other remaining countries. The lack of EU/UK regulatory and company ‘passporting’ rights and a common customs union, if that becomes a relevant issue, may be another driver for increased foreign investment in France and elsewhere. “There are still a number of uncertainties but Brexit in the short-term is expected to retard European growth rates,” adds De Vijlder. The currency volatility it involves is also a concern for corporate treasuries.

A further issue that De Vijlder sees as relevant for corporate treasurers at domestic French firms, or international companies operating there, is the European Central Bank’s (ECB) stance on its on-going quantitative easing (QE) programme. “We know this will continue in 2017, which obviously impacts low interest rates and the euro versus dollar equation, but we expect the ECB to communicate its longer-term 2018 intentions this summer,” he says. “We are predicting a gradual scaling back of QE in 2018.”

The wider euro currency dynamic is also very interesting, “as it’s not clear where US fiscal policy under president Trump will go yet”. Comments from other members of the incoming US administration that Germany is keeping the level of the euro artificially low – with China another alleged ‘villain’ – suggest that a period of general currency volatility may await.

This and the other uncertainties specifically facing France – from the election, to the ECB’s QE stance, terrorist attacks against the important tourist sector, future trade flows and currency positions post-Brexit, and if further labour market reforms are on the way – mean that cautious optimism is the order of the day.

“Economic recovery in France, as in many of its peers, is subject to downside risks,” says Malas-Mroueh, citing the high degree of domestic and external uncertainty. Fitch judges the economic impact of Brexit to be moderate, at around 0.2% per year in the two years ahead. “This has already been incorporated into our forecast of 1.3% GDP growth in 2017 and 1.2% in 2018.”

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