Global Daily – France in stormy waters

by: Aline Schuiling , Arjen van Dijkhuizen , Maritza Cabezas

Global-Daily-Insight-16-September-2014.pdf ()
  • The French government will seek a vote of confidence today – risk of downgrade this Friday
  • US consumer data signals strong economic growth in the third quarter
  • Disappointing Chinese data could trigger more targeted stimulus

Troubled French government seeks vote of confidence

France’s Prime Minister, Manuel Valls, will ask parliament to support the recently reshuffled French government in a vote of confidence today. France’s government is in stormy waters. Last week, Finance Minister Michel Sapin announced that, in conflict with agreements with the European Commission, the government’s budget deficit would not meet the 3% GDP-target in 2015, but only in 2017. Moreover, according to Mr Sapin’s new projections, the budget deficit will no longer fall to 3.8% this year (from 4.3% in 2013), but rise to 4.4%. This partly reflects that GDP growth will be merely 0.4%, instead of the earlier projected 1%. France is planning to ask permission from Europe for a delay in meeting the deficit target in exchange for economic reforms. It already received a two-year delay in 2013. President Hollande announced an ambitious national reform programme last year, but many of the measures still need to be detailed and approved by parliament. Indeed, Mr Valls probably hopes that winning the confidence vote today will smoothen the way for the speedy implementation of reforms, which in turn should raise the chances that France will get more time from Europe to reach the 3% deficit target. In case the government loses the vote, there will probably be new parliamentary elections. Rating Agency Moody’s is scheduled to review France’s credit rating on Friday. It currently has rated the country Aa1 with a negative outlook. There is a significant risk of a downgrade.


US consumers brighter

Recent US consumer data has been upbeat. Headline retail sales rose by 0.6% mom in August up from 0% the previous month. Auto sales, which are often seen as a leading indicators of the cycle posted a 1.5% gain. Core sales which are used by the Commerce Department to estimate consumer spending in the GDP report rose to 0.4% after an upwardly revised 0.3% in July. But there were also upside revisions to the data from previous months. As a result, we are seeing upside risks to our GDP forecast of 3.2% in the third quarter. Meanwhile, September’s University of Michigan sentiment indicator reached a 14-month high, at 84.6 up from 82.5 the previous month, with expectations for the future showing a strong rebound. All this provides more evidence that the economy will continue to grow at above trend rates this year.

Chinese slowdown might trigger more targeted stimulus

Economic data published in recent days show that Chinese domestic demand is slowing, as the property market correction and the curtailment of shadow banking are leaving their mark. At the same time, stimulus effects are fading. High frequency activity data (industrial production, retail sales, fixed asset investment) all have dropped further, while annual import growth was negative in July and August. However, after dropping sharply last month to the lowest levels since the global financial crisis, lending data clearly recovered in August. This highlights that the July data were distorted by seasonal and ad hoc factors. That said, aggregate social financing clearly remained below the levels seen in the first half of this year. This drop reflects sharper regulation for off-balance sheet lending, impacting the issuance of bills and trust loans. Meanwhile, the pick-up in exports is a welcome tailwind for the economy. All in all, risks to the 2014 official growth target (and our forecast of 7.5%) are increasing. Still, should economic data continue to disappoint, we expect the authorities to add more targeted stimulus to prevent the deleveraging process from becoming disorderly. We believe they will remain cautious in putting in place very aggressive easing, as that could jeopardise the needed deleveraging from high debt levels. We view the recent changes to the Budget Law as an important step to increase fiscal transparency, although it remains to be seen what this will mean for the overall fiscal stance. All in all, we have left our 2014 and 2015 growth forecasts at 7.5% and 7%, respectively (please see our China Watch, Signs of cooling illustrate rebalancing for more details).