Economic Indicators Are Turning Green

Thanks to the very strong rise in August industrial production, the appraisal of the latest economic indicators for France is positive on balance. Without this positive print, the picture would be more mixed.

The main negative surprise came from the number of category A jobseekers registered with Pôle Emploi (i.e. those that have not worked for the past month), which rose strongly in August (+1.4% m/m), halting the slight downward trend observed since the beginning of the year. The underlying improving trend is not called into question, however, since August’s poor showing is largely due to a statistical irregularity. As Pôle Emploi explained in its press release, there was an unusually sharp decline in the number of jobseekers removed from the listing for failing to update their information, which is due in part to the greater number of working days during the reference period. Fewer removals means more jobseekers registered with Pôle Emploi. Although this glitch must be kept in perspective, it is nonetheless a good reminder that the reversal of the unemployment curve is a laborious process.

Household confidence also disappointed in September but to a smaller extent since the INSEE composite index remained flat at 97, contrary to our expectation of a 1-point improvement. This stability reflects opposing trends between, on the one hand, the balance of opinions concerning the opportunity to make big-ticket purchases, future living standards in France and the unemployment outlook (which are improving), and on the other, past individual financial situations and the past standard of living in France (which are declining). Yet the improving factors seem to carry more weight than the negative ones. As a result, we are keeping in perspective the somewhat disappointing overall stability of household confidence, especially since business confidence improved slightly in September.

There was nothing surprising about the preliminary inflation estimate for September, which at 0.4% y/y was in line with our expectations. Although inflation remains uncomfortably low, it is gradually picking up. Yet this slight upturn in inflation is mainly due to the energy component, which made a less negative contribution as the impact of past oil price declines tapers off. Although core inflation is not as low as it reaches 0.7% y/y in September according to our estimates, it has not shown the least signs of accelerating, much to the contrary, and it has even slowed over the recent period (from 0.7% in June to 0.5% in July and 0.4% in August). This is concerning, especially since we think the situation will persist due to the lack of more robust growth.

Household spending on goods also increased as expected in August (+0.7% m/m). This rebound is good news because it brings to an end a 4-month decline, and tends to confirm the temporary nature of this poor statistical series. It helps reduce the Q3 negative carry-over of consumer spending on goods, from -1% q/q to -0.6% q/q. It also supports our forecast of a slight upturn in overall consumption in Q3, to 0.1% q/q from -0.1% q/q in Q2. This expected rebound is relatively limited because even if consumer spending on goods in September proves to be as strong as in August, the Q3 figure would still contract (-0.3% q/q according to our forecasts, after 0% in Q2) due to negative carry-over effects. This mild increase in overall consumption is also based on a technical rebound in the consumption of services (+0.4% q/q according to our expectations) after a sharp – and rare – Q2 decline of 0.2%. All these factors contribute to our forecast of a rebound in Q3 GDP to 0.3% q/q (vs. -0.1% in Q2).

Industrial output rose 2.1% m/m in August, which also supports our growth scenario. This even-stronger-than-expected rebound helped push the carry-over into positive territory (+0.2% q/q from -1.2% q/q). It was also a solid performance since it was fairly broad-based across the various segments of industrial production.

To sum up, based on the hard data available so far (two of the three months), our nowcasting model estimates Q3 growth at 0.3% q/q while soft data (available for the full three months of Q3) point to growth of 0.4% q/q. These results reassure our growth forecast and even suggest an upside risk. In comparison, the Bank of France is forecasting growth of 0.3% q/q and the INSEE has just lowered its forecast to 0.2% q/q in its October update, which is 0.1 points lower than its June figure.

This adjustment, combined with the stronger-than-expected Q2 payback, has led to a significant downward revision in the INSEE’s average annual growth forecast to 1.3% in 2016, from 1.6% previously. Note also that the INSEE maintained its Q4 forecast unchanged at 0.4% q/q. We are less optimistic about Q4 and are forecasting growth of only 0.2% q/q. Yet for the full year, this makes no difference: our 2016 growth forecast also reaches 1.3%. This sluggish outcome masks however a higher contribution of domestic demand (1.7 percentage points), partly offset by the negative contribution of net exports (-0.4 pp) and change in inventories (-0.1 pp).

by Hélène BAUDCHON