France: The Sick Man Of The EU

 |  Includes: EWQ
by: Hale Stewart

The EU economy's GDP is valued at ~12.7 trillion euros. Two countries - Germany and France - are responsible for about 50% of the economic growth of this region. However, since the end of the recession, the French economy has continued to underperform. And a recent story in Bloomberg highlights that French business has lobbied the Hollande government to make policy changes to encourage growth. A look at the GDP and ISM data highlights that France is indeed still the "sick man of Europe."

Let's start by looking at French GDP and its components.

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The largest quarterly growth in the last 4 quarters was .6% in 2Q13. This is a very weak rate, and it occurred nearly a year ago. Since that time, overall growth has been fluctuating around the 0% rate. Household consumption has expanded and contracted in the same number of quarters (2 each), and the -.5% in the first quarter of this year negates the overall growth in this data subset for the last three years. Investment is no better, with that data point printing three quarters of contraction. The only solid point is exports, which have increased. Put bluntly, the GDP accounts are very concerning.

Not all is bad from this report, as household income is increasing.

In nominal terms, households' gross disposable income (GDI) upturned in Q1 (+1.3% after -0.3%). Indeed, taxes on income and wealth markedly decreased (-4.1%), following a strong H2 2013 (+1.7% in 2013 Q3 and +5.1% in Q4). This progress resulted notably from measures adopted to enhance the efficiency of taxes in 2013: the de-indexation of the income tax thresholds, the creation of a 45% bracket and the lowering of the family quotient ceiling. Moreover, wages received by households increased at the same rate as at the end of 2013 (+0.5%), and social benefits decelerated slightly (+0.7% after +0.8%).

It may take a few more quarters for the change in tax policy to work its way through the French economy.

In addition, unemployment is also very high:

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What we see above is three years of unemployment over 10% -- clearly indicating there is something fundamentally wrong with the French growth picture.

And finally, there is the French composite Markit number:

The recent Markit report stated that France was indeed the main drag on EU growth. And the above data simply confirm that analysis.

The best news in the above data is the increase in income. However, it's also obvious that France has serious problems; investment is weak, unemployment is high and overall demand is low. And, there is little to think the current administration has any solid policy prescriptions to change the economy's current course.

Hale Stewart,