The preliminary flash estimate of France’s real GDP in the third quarter is a strong quarter-to-quarter 3% advance, considerably above the 2.2% advance for the euro area and the 1.8% gain for Germany. The US economy grew only 0.5% during the quarter. A sharp acceleration of household consumption was the main force behind the French economy’s advance. Consumers were spending part of their excess savings. On the production side, market services gained 4.7% whereas goods production was down 0.3% qoq. The fact that the economy is dominated by services, which account for 79% of output, helps explain the overall economic rebound. Spending has rotated from goods to services as the economy reopened. At the end of Q3, France’s economy had recovered to just 1% below its end-of-2019 level.
The contraction in goods production and weak investment during the quarter are warning signs for the fourth quarter. The culprits continued to be supply bottlenecks and materials shortages. These supply chain issues are unlikely to moderate significantly in Q4 and will still be a factor in the first half of 2022 and perhaps longer. The flash October estimate of the HIS Markit Purchasing Managers Index (PMI) for France reveals the impact supply shortages are having on goods producers. Manufacturing PMI fell to a 9-month low, and Composite PMI, which includes services, dropped to a 6-month low, despite service activities registering a 3-month high. Supplier performance was the second worst on record, and backlogs of work built up. Firms lacked the stocks to produce their goods. The final October figure, reported November 1, confirmed that manufacturing output in France fell for the first time since January.
The shortages experienced by firms, together with soaring energy prices, led to stronger inflationary pressures in October. The French CPI at 2.6% y/y is the highest rate of price increase in 13 years. While energy prices and goods shortages are likely to eventually ease in 2022, inflation will continue to be a concern for consumers, producers, and policymakers in the coming months. The government has presented measures to counter the impact of higher inflation on consumers’ purchasing power, including a reduction in power taxes and grants to low-income households.
The pandemic continues to be a downside risk for the French economy, particularly the service sector, and for French stocks. The vaccination rate had stagnated after accelerating during the summer. On October 30th, there were 7,360 daily new cases of COVID-19 in France, the most since September 21 but this may reflect mainly an end to free testing. The number of new cases had been falling before this spike. France is dealing with high rates of vaccine skepticism, among the highest in the world. France’s health pass, introduced in July, is required for access to long-distance transport or venues such as restaurants, cafes, bars, cinemas, and sports stadiums. While it is controversial, it has proved to be effective in stimulating a surge in vaccinations. In fact, the 54% of the French population that had received one dose before the pass was introduced, has shot up to 75%, which is above the figures for the UK and Germany. The ending of free Covid tests last weekend is hoped to lead to another pickup in vaccinations. But it also will lead to a distortion in the data, an undercounting of new cases. Adding to the pandemic risk is the possibility of new, more dangerous variants emerging. The Delta variant has been very harmful in recent months.
French stocks have performed well this year. The CAC 40, a benchmark for the French market, has gained 24.8% year-to-date as of November 1. This is considerably better than the German market’s benchmark DAX that gained 16.2% and the UK’s market FTSE 100 that gained 12.6%. We expect the French economy’s growth to moderate in the fourth quarter and in the first quarter of 2022 as activity normalizes, with forward momentum nevertheless continuing. Consumer spending will likely hold up the economy because pent-up demand is still very substantial. At Cumberland Advisors, we are maintaining our positions in French equities in our International and Global Equity ETF Portfolios. We will follow closely the risks noted above and developments in the run-up to the French presidential elections in April.
Bill Witherell
Chief Global Economist
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Sources: Oxford Economics, HIS Markit, CNBC, Reuters, France 24, Goldman Sachs Economic Research
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