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Tuesday, 24 October 2017

Waiting for Waterloo

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Anthony Peters sees a long and inexorable decline of the French economy.

Anthony Peters

Anthony Peters SwissInvest strategist

Last week, when France was downgraded by Standard & Poor’s to AA from AA+, I opted not to comment on the basis that I do occasionally find myself accused for being a tad on the Francophobe side. Nothing could be further from the truth although I did last night, over dinner, agree to travel with a friend next March to visit the battlefield at Waterloo near Brussels, the site of Lord Wellington’s decisive victory over Emperor Napoleon Bonaparte in June 1815 which I know but which he has never seen.

With the UK economic numbers beginning to strengthen to what some regard as sustainable levels and with the Bank of England already revising its forward guidance accordingly, it would be churlish to snigger at yet another set of disappointing releases from INSEE, but…

Churlish or not, it would be wrong to try to overlook the preliminary release on French Q3 GDP which undershot the consensus forecast which was flat, quarter over quarter, and came in at -0.1% and which thus left the year over year figure at +0.2% as opposed to the consensus forecast of +0.3%. In plain English, France is in a mess.

Chain reaction

Martin Tixier of Macronomy BlogSpot , a Frenchman, I hasten to add, was one of the first to point out the chain of weaknesses in the way in which France works (or not, as the case may be) and the hopelessness of its situation. This, incidentally, was well before the arrival of President Hollande. France has structurally painted itself into a corner and as is now becoming evident, the “dirigiste” approach which has kept it going against the odds for so long has run out of fuel.

I remember as far back as the late 1970s when I began my banking career in the foreign exchange department of Barclays in Zurich, France was always the prime candidate to follow Britain into de-industrialisation and decline. Again and again it defied gravity and we all watched on as public services improved, infrastructure projects thrived and labour unrest always seemed to end with a victory for the workers. No matter how often it looked as though it was game over, France kept on coming back.

The UK might be in a better space than is France but it is not that much better than would appear. Hubris and flag waving will have to wait…

Meanwhile, the tax take has risen to 53% of GDP and the spend is at 56%. Corporate profit margins are the lowest amongst the major industrial nations and what we would regard as the principal incentives to work and produce have been gradually squeezed out of the population. I add here that the one Frenchman who most frequently accuses me of being a biased and bigoted Anglo-Saxon, we’ll call him “Hank”, was educated in the UK and has chosen to spent his working life in the UK and in the USA where he still lives.

At the back end of last week, we also saw Industrial Production and Manufacturing Production for September significantly miss forecasts, the former being -0.5% MoM (forecast +0.1%) and -0.9% YoY (-0.9%) and the latter -0.7% MoM (+0.4%) and -1.3% YoY (-1.1%) respectively.

Reality check

A Parisian contact of mine suggests that France is now going through, belatedly, what Britain went through in the 70s and 80s by way of a post-industrial reality check.

Equally belatedly, Hollande is trying to wind back not only his own promises of spend to grow but to reach deeper and to bring public finances onto a level more attuned to the early 21st century than those of mid- to late 20th where they seem to have been ship-wrecked.

However, this will be a process which will take decades rather than years and trying to smoothly achieve such a fundamental shift in socio-economic philosophy while competing with a resurgent Asia and a newly energy independent USA is a very tall order.

Whatever needs to be done must be in huge conflict to Hollande’s ideological instincts but I suspect that we will look back in twenty years time and credit him as being the one who took the first cautious steps in the long journey of reforming France. However, history will most probably not remember him for that but for the antediluvian policies upon which he was elected to the Elysee Palace.

Meanwhile, even the UK’s employment statistics are improving and sentiment is improving at all levels. Nevertheless, wages are still stagnant and the persistently rising retail sales – they are due to be reported this morning – have me worried in terms of the amount of credit which is being piled up again. There is no doubt that earnings will begin to move again in the not too distant future but borrow-to-grow at the private sector/household level is no more advisable than it is in the public sector.

The UK might be in a better space than is France but it is not that much better than would appear. Hubris and flag waving will have to wait until the bicentenary of Waterloo in June 2015.

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