The French pa­tient

Financial Mirror (Cyprus) - - FRONT PAGE -

As a French­man vis­it­ing Italy last month, I had the strong sense that for the first time in decades France was lag­ging its transalpine neigh­bour. Ital­ian busi­ness and con­sumer con­fi­dence has picked-up over the last two years, and un­em­ploy­ment has de­clined for four straight quar­ters. France, by con­trast, is the only Euro­pean coun­try that saw ris­ing un­em­ploy­ment dur­ing 2015. Po­lit­i­cal con­fi­dence has evap­o­rated as re­in­forced by the re­cent rather des­per­ate tac­ti­cal vot­ing to deny the Na­tional Front party vic­to­ries in re­gional elec­tions. And as if that was not enough, the Paris at­tacks are ex­pected to cut -0.1% from French GDP this year.

And yet de­spite th­ese head­winds, France dis­plays pock­ets of eco­nomic strength. The im­pact of eas­ing by the Euro­pean Cen­tral Bank has been to spur a 4% YoY rise in con­sumer credit, while loans to do­mes­tic firms are up 3.7%. An im­proved credit cy­cle has been aided by non-bank in­sti­tu­tions such as in­sur­ance com­pa­nies reach­ing-for-yield and mov­ing to­ward direct fi­nanc­ing ac­tiv­ity. Also, the lower euro and a re­duced pay­roll levy since 2013 has helped in­dus­trial profit mar­gins hit a post-2007 high, re­flect­ing a near 3pp rise since mid-2014. Th­ese were the ar­gu­ments which I broadly made back in June.

This begs the ques­tion, why does French growth and em­ploy­ment still lag? The stan­dard ex­pla­na­tion is a lack of struc­tural re­forms. That may be so, but it does not ex­plain the last two years cycli­cal weak­ness. The more straight­for­ward ex­pla­na­tion is that France’s con­struc­tion sec­tor is in a de­pres­sion, with in­vest­ment hav­ing fallen -20% in real terms since 2008; de­clines have ac­cel­er­ated since 2013 (see chart).

Ex­clud­ing con­struc­tion, GDP growth would have hit 1.7% YoY in 3Q15, in­stead of 1.2%. The sec­tor now ac­counts for a quar­ter of cor­po­rate bank­rupt­cies, while lay-offs in 3Q rose by 5%. By con­trast, most eu­ro­zone coun­tries are now adding con­struc­tion jobs. Given the la­bor-in­ten­sive na­ture of the sec­tor, it is prob­a­bly not sur­pris­ing that French un­em­ploy­ment is so in­tractable a prob­lem.

France’s con­struc­tion de­pres­sion has been ag­gra­vated by pol­icy mis­takes — in­clud­ing in­creased en­vi­ron­men­tal and so­cial reg­u­la­tion — that are now be­ing cor­rected. The gov­ern­ment is also sup­port­ing first-time home buy­ers with a loan guar­an­tee scheme that of­fers zero in­ter­est fi­nance — the so called pret a taux zero.

The scope of the PTZ will be sub­stan­tially ex­tended in Jan­uary to in­clude pur­chases of ex­ist­ing homes and flats on the con­di­tion that buy­ers spend a sum equiv­a­lent to at least 25% of the pur­chase price on re­fur­bish­ment.

Such zero-cost fi­nance will cover up to 40% of the pur­chase price, up from 20% pre­vi­ously. Also, el­i­gi­ble buy­ers can opt for a 5-year grace pe­riod on the re­pay­ment of the prin­ci­pal. Th­ese mea­sures will sig­nif­i­cantly boost the pur­chas­ing power of first-time buy­ers as the PTZ can be used as a down-pay­ment, against which a bank loan can be raised. The cost of the pro­gram to the pub­lic purse is about EUR 2 bln.

If the new PTZ, as­so­ci­ated with record low mort­gage rates, is able stop the bleed — as did the UK’s “Help to Buy” scheme since 2013 — then, by 2017, French em­ploy­ment should grad­u­ally im­prove to lev­els pre­vail­ing in the rest of Europe. The prob­a­bil­ity of this sce­nario is still hard to as­sess, but it is en­cour­ag­ing that the gov­ern­ment now un­der­stands the im­por­tance of the con­struc­tion sec­tor, and seems will­ing to ad­mit that its own poli­cies proved to be highly de­struc­tive.

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