Euler Hermes France 2017 Barometer: 2 out of 3 French companies to resume investing

Household consumption will be the main driver of the French economy in 2017, contributing 1.1 percentage points to GDP growth, and is expected to increase by 2.1 percent in 2017 and by 2.3 percent in 2018 (+2.3 percent in 2016). French households are regaining confidence (the index is at 100, its best level since May 2007).

Household investment is expected to increase by 3.6 percent in 2017 and by 4 percent in 2018, after +2.4 percent in 2016, in line with the upturn in the construction sector. Public investment will also be a strong element from 2018. It is expected to increase by 2 percent from 2018, after -0.7 percent in 2017 and -0.1 percent in 2016. 'All the components of investment are there,' underlined Stéphane Colliac, Euler Hermes France chief economist. 'After an increase of 2.8 percent in 2016, total investment is expected to accelerate to +3.2 percent in 2017.'

For businesses, the renewed demand is welcome. Turnover in non-energy industries is expected to increase more rapidly in 2017 and 2018 to 2.2 percent (+1.3 percent in 2016), also driven by higher inflation (+1.1 percent in 2017 after 0.2 percent in 2016). On the other hand, corporate margins have stagnated at 31.4 percent for the last two quarters, while the impact of support measures (CICE) and cheap oil has diminished. Economic policies will have been major factors in the business investment upswing, which accelerated in 2016 (+3.6 percent), supported by the additional amortization measures which contributed up to half of the performance.

The lifting of the uncertainties surrounding the French Presidential election led Euler Hermes to raise its French growth scenario from +1.4 percent to +1.5 percent in 2017, and from +1.3 percent to +1.5 percent in 2018.

'Apart from confidence, the President's economic program should generate business investment through more demand, a fiscal countershock and a public investment plan,' said Ludovic Subran, chief economist at Euler Hermes. 'First, the substitution of employee contributions with a 1.7 point increase in the CSG, and exemption from housing tax of 80 percent of the French population should support demand. And the reduction in corporation tax from 33.3 percent to 25 percent and the 6-point drop in employer social security contributions should boost margins. Finally, the five-year public investment plan of 50 billion euros makes it unlikely to return to the level of 85 billion euros recorded in 2012. Moreover, the public deficit continues at more than 3 percent of GDP (3.2 percent in 2018).

'Ultimately, business investment is expected to increase to +2.9 percent in 2017 and +3 percent in 2018. Despite this improvement, the investment gap remains difficult to absorb: it is 38 billion euros, versus 40 billion euros in 2015. At the current rate, it would take 15 years to catch up,' concludes Ludovic Subran.