After years of measuring unfavorably against Europe’s economic powerhouse Germany, France may finally have something to crow about.
The euro area’s second-largest economy is outpacing its neighbor and the region as a whole — excelling in weathering blows from trade wars and weaker global momentum. Some of the divergence is due to fortuitously timed tax cuts and less reliance on exports, but it also reflects early dividends from President Emmanuel Macron’s reforms that aim to sow the seeds of longer-term growth.
Evidence that there’s more to the story than timing can be seen in the robust business investment that’s followed Macron’s corporate-tax cuts, and increases in employment after changes to labor laws. The pace of job creation is so fast that economists struggle to explain it, and Bank of France chief economist Olivier Garnier has described it as “remarkable.”
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“With respect to economic policies, we have an all thumbs up for France,” said Berenberg European Economist Florian Hense. “Whether it’s Germany in the early 2000s or France now, the labor market is actually key for all layers of the economy.”
The awakening of the French economy as Germany slips toward recession could have wider policy implications for Europe by giving Macron political capital to push his agenda. That includes a more active industrial policy and building European champions to rival the U.S. and China, and more sharing of resources between member states.
The French leader has already registered some success with an agreement on a euro-zone budget, albeit far smaller than initial ambitions. But confidence is running so high in Paris, that officials no longer shy of lecturing Germany on its national fiscal policy.
In the third quarter, the economy posted better-than-forecast 0.3% growth, with domestic demand a key driver. Surveys for October showed stronger French growth at the start of the fourth quarter, while Germany was weighed down by manufacturing.
France is attracting a growing share of foreign investment, and existing businesses have also kept spending as they are less exposed than German peers to the highs and lows of global trade.
At Axa, chief economist Gilles Moec says ultra-loose European Central Bank monetary policy may also be playing a part in the relative strength of French investment, which is mostly funded by borrowing, in contrast to Germany.
In a world of “low-for-long” interest rates, this is a strategy that could also pay off in the longer term. “Beyond the cyclical support, the resilience in investment is conducive to decent prospects for potential growth as well,” he said.
Even if France is set for a brighter period, it still has some way to go before it can truly measure up to Germany.
A vast and costly public sector backstops French resilience, with the government spending 56% of annual economic output compared with 45% in Germany. As a result, France’s public debt hovers near 100% of GDP.
Also, unemployment may be falling, but it’s still more than double the rate in Germany.
The French government points to the quality of jobs as a sign reforms are working. Crucially, the share of new jobs with stable, permanent contracts has been rising since Macron changed laws that companies said discouraged hiring.
The government is also trumpeting a more favorable environment for business since he cut wealth taxes and put corporate tax on a downward trajectory. Investment is rising, and the number of new start-ups has surged to record levels since Macron’s election.
Only half way through his five-year term, Macron is not done yet. At the start of this month, changes to unemployment benefits kicked in that aim to encourage workers to take jobs and employers to offer better contracts. He’s also embarking on a top-to-bottom overhaul of the pension system that would in theory allow workers to be more mobile.
On top of that, the government is considering more tax cuts for companies producing in France and changes to strategic sectors where the state invests.
“Nothing will make us retreat from transforming the country,” French Finance Minister Bruno Le Maire said last month on RTL Radio. “Emmanuel Macron was elected for that.”