France

Author: | Published: 2 Aug 2000
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THE REAL ECONOMY

Revisions made by INSEE appearing in the detailed national accounts for the fourth quarter of 1999 show that the deceleration of activity caused by the downturn in emerging countries was limited and temporary. Indeed, French economic growth was even and rapid throughout 1998 and 1999. As an annual average, GDP growth was revised upwards by 0.2 percentage point to 2.9% in 1999, reflecting a revision of the same magnitude to first quarter growth. The final growth figure was only slightly lower than that recorded for 1998 (3.2%, itself the result of a downward 0.2 point revision). In year-on- year terms, GDP rose 3.1% in 1999, after 3% in 1998.

The economy remained buoyant in the first quarter of 2000, with industrial production climbing 1.1% in February. The 12-month gain was 4.2%, against 3.4% in January.

As a whole, industrial activity rose further in April, although business leaders surveyed by the Banque de France indicated that its rate of increase was slower than in March.

Activity remains robust in the construction industry. According to Ministry of Equipment statistics, the number of housing starts over the first quarter was 10.7% higher than in the fourth quarter of 1999.

Household consumption is still on a rising trend, despite a slight downturn in March (-1.7%, or + 4.1% over 12 months). Over the first quarter as a whole, household consumption of manufactured products rose 2.2%, against a 0.3% gain in the preceding quarter.

Consumption is being boosted by the high level of household confidence. Following four months of stability, the summary indicator of household sentiment posted another sharp improvement in April, topping the historical peak of late 1999.

Expectations relating in particular to the future level of unemployment are again much more favourable. The improvement in the labour market resulted in a sharp decline in the unemployment rate to 10.0% of the labour force in March, its lowest level since January 1992 and 1.4 points below the level recorded one year earlier.

Investment continues to benefit from a highly favourable environment. The latest quarterly Banque de France survey of the financial situation of companies ­ bearing on the first three months of this year ­ shows an improvement to satisfactory levels in almost all industries. Investment expenditure accelerated over the quarter, and appears stronger than in the corresponding period of previous years.

The presently intensive utilization of industrial productive capacity is likely to provide an additional incentive to invest. The capacity utilization rate was 85.9% in April, well above its long-term average of 84.28%.

All in all, the economy is set to post annualized growth of almost 4% in the first half.

PRICE DEVELOPMENTS

The unadjusted provisional retail price index (1998=100) was unchanged in April 2000, but registered a 0.2% decline on a seasonally-adjusted basis. On a year-on-year basis, the increase in the consumer price index fell back to an unadjusted 1.3% (after a 1.5% gain in March), while the seasonally-adjusted index was up 1.2% (after rising 1.6% in March).

The indicator of underlying inflation ­ which excludes the impact of the cut in VAT ­ rose 0.4% in April, or 1% over 12 months (against a 0.7% gain in the year to March).

The rate of increase in industrial producer prices of intermediate goods has accelerated, climbing 3.5% in the year to March 2000 (after 3% in February). This was the strongest gain recorded since October 1995.

MONTHLY BUSINESS SURVEY

According to the business leaders surveyed by the Banque de France, industrial activity generally rose further in April, but not as quickly as in March. While it was stable for consumer goods, automobiles and capital goods, it continued to grow for intermediate goods and fell somewhat in the agri-food industry.

The capacity utilization rate continued to be very much above its long-run average.

Aggregate demand showed another slight increase. The buoyancy of the domestic market was underpinned by firm inter-industrial trade and robust household consumption. Foreign demand continued to strengthen, though not as much as in recent months, mainly due to a slowdown in orders from the European market.

Order books continued to be considered very well-filled on the whole. Inventories recorded little overall change and remained in line with desired levels, although they appeared to be slightly below normal in the intermediate goods industry.

The outlook for the coming months is very bright, with the likelihood of an across-the-board increase in activity.

Commodity prices continued to rise. While this rise has generally as yet only partially been passed on to finished product prices, significant price increases have been seen for several components of the intermediate goods industry.

Investment planned for 2000 went ahead as scheduled. It mainly concerned the modernization of equipment, but was also increasingly aimed at widening productive capacity.

Retail activity rose in April, but decreased slightly relative to the previous two month period, which was affected by the sales.

Permanent staff levels, which were stable in industry and the retail industry, rose further in the construction and market services industries. Several industries encountered difficulty in recruiting, and skilled labour shortages were reported in some high-growth industries.

The quarterly change in GDP forecast by the monthly composite business indicator for the second quarter of 2000 remained unchanged at +0.9% (after an increase of about 0.9% in the previous quarter). Trends in demand-related factors continue to be favourable thanks to well-filled order books and very good prospects for growth during the coming months. Furthermore, the prospect of a slowdown in activity continues to be slim, meaning that the French economy should continue to grow in the months ahead.

THE BALANCE OF PAYMENTS IN FEBRUARY 2000

The current account surplus doubled in seasonally-adjusted terms from euro 1.6 billion ($1.5 billion) in January 2000 to euro 3.2 billion in February, and despite a slight drop in the traded goods balance. The balances on the services account and in foreign investment income improved significantly on the preceding month.

The unadjusted current account balance fell euro 2.7 billion to euro 1.7 billion in February compared with January. This reflected the disappearance of the current transfers surplus.

For the first two months of 2000, the current account posted a surplus of euro 6.2 billion, euro 500 million less than for the corresponding period in 1999. The surplus in goods and services excluding travel declined euro 700 million to euro 1.7 billion. This was the result of a 15.3% increase in expenditure that clearly outpaced that in receipts (13%). At the same time, foreign investment income fell euro 900 million to euro 2 billion, with a simultaneous reduction in direct investment income and portfolio investment income. In contrast, the balance on the current transfers account rose euro 1 billion to euro 1.2 billion.

The financial account posted a surplus of euro 5 billion in February.

Net direct investment deteriorated slightly relative to January, to a deficit of euro 2.6 billion. The drop in French transactions by non-residents was greater than for transactions by French residents abroad.

Portfolio investment had resulted in net inflows of capital in the preceding two months but registered a deficit of euro 6.2 billion in February, which is more in line with usual trends. Residents' investment abroad rose to euro 12.9 billion, including euro 4.1 billion in purchases of foreign shares and euro 6 billion in purchases of money market securities, contrasting with the euro 5.4 billion in net sales observed the month before. Although non-residents' purchases of French securities were lower, they doubled relative to January, to euro 6.7 billion, of which euro 5.7 billion was accounted for by bonds.

Other investments were characterized by a fresh rise in net bank liabilities (euro 13 billion) and a euro 500 million increase in reserve assets.

With a deficit of euro 1.4 billion for the first two months of 2000, the financial account was almost balanced over the period. The main difference relative to the first two months of 1999 was the sharp reduction in net portfolio investment abroad, which was partially offset by the change in the reserve assets balance.

REVISIONS TO 1999 DATA AND CHANGES IN METHODOLOGY

This time of year usually features revisions to balance of payments figures for the preceding year to take account of information that has emerged since the initial provisional annual figures were published. This time the revision concerns the past five years and is unusually large. Two factors are responsible: firstly, the methodology relating to interest flows on swaps has changed, resulting in their inclusion under the 'derivatives' heading in the financial account; and secondly, there have been changes in the methodology and accounting linked to employees' remuneration.

The amounts recorded in the employees' remuneration item are now the result of a statistical estimation that defines flows better and relies on a wider gross basis (including employee and employer welfare contributions). This change conforms to recommendations made in the 5th IMF Manual. Related adjustments are made to several other items in the current account in order to include the consumption expenditure of individuals that cross borders to work (travel), to impute Social Security contributions (present transfers) and to trim earned income from certain items to which they were wrongly posted (travel, transfers of workers' savings).

This article was taken from the Banque de France's Bulletin No.77, May 2000, available at www.banque-france.fr