C'est l'economie, stupide. One probably doesn't need Google Translate to understand the famous Clinton-era political mantra translated into French. As the French election dominates the headlines and spurs the markets today, I note a distinct lack of focus in the financial media on the state of France's economy. The rising tide of global populism in the past 12 months has been fed by a sense that some are not sharing in the economic largesse granted by the world's central banks. The economic prosperity generated in the 8.5 years since Lehman imploded may or may not have been evenly split in countries around the world, but in France that point is almost moot: there simply hasn't been any prosperity.
The simplest way to understand the state of the French economy is to download the Banque De France's quarterly statistical update, Principaux Indicateurs Statistiques. This 1-page PDF shows the parlous state of economic activity in the Republic. Quickly through the charts:
Real GDP Growth (Taux De Croissance Du PIB): French GDP growth was a depressing 1.1% in the fourth quarter, and in fact, the BDF is predicting in a separate publication that 1Q2017 French GDP growth will run at an even-slower 0.3% annual rate. What's really striking about the chart of France's GDP is the consistency of the (lack of) growth. France's economy has produced an astounding 22 consecutive quarters of sub-2% growth. The recent numbers are no aberration, and one can only conclude that this dormant economy is what France--barring structural changes--will continue to experience.
Unemployment (Taux De Chomage) To be fair France's lack of GDP growth has been endemic to Europe as a whole, and it is really the consistent 0.5%-1.0% lagging of the growth rate produced in the rest of Europe (4Q2016 GDP grew 1.8% for Europe as a whole and 1.9% for Germany) that needs to be explained. On unemployment, it is a completely different story. Unemployment rates for the whole of Europe and Germany specifically have fallen dramatically since 2012. That has not been the case in France, where the most recent reading of 10% is only slightly less than the 2012 figure, and, again, shows a remarkable steadiness over the past four years
Public Finances (Finances Publiques) Not surprisingly given the weakness in the aforementioned indicators, these figures show France lagging its European brethren. France's public deficit was 3.4% of GDP in 2016 versus a 2.1% deficit for the Eurozone as a whole and Germany's 0.8% budget surplus. Also, France's public debt was 96% of GDP at year-end, compared to 68.3% in Germany and 89.4% across the Eurozone,
It most be particularly galling to the French populace that their economic figures so badly lag those of Europe as a whole, which includes "stressed" economies such as Greece, Italy and Portugal. I spent five years living in England and doing business in both Germany and France, and I never found anyone who expected the Gallic economic engine to rev with the same ferocity as the Teutonic or British one. But France has historically been considered the third leg of the European "Big Three" and the statistics quoted above show that that perception is no longer reality.
Against that backdrop, it is not so surprising that the party currently holding the Presidential office in France, Francois Hollande's Socialists, did so poorly in yesterday's election. The Socialist candidate, Benoit Hamon, drew an almost inconceivably low 6.36% of the popular vote, placing him in a distant fifth in the election.
It is important to note that the terrifically unpopular Hollande government also included current En Marche! candidate and perceived front-runner, Emmanuel Macron. Macron was France's Minister of the Economy from August 2014 - August 2016, a period in which French economic growth was nearly nonexistent. He was wise enough to ditch the dying Socialist Party and start his own group, but anyone presenting him as a major change from Hollande is delusional. Four years as an investment banker at Rothschild hardly makes Macron a private sector stalwart, and being less anti-business than Hollande and his core Socialist base really is not saying much.
So, the markets are afraid of Marine Le Pen, and happy that Macron out-polled her yesterday. Some of her ideas, chiefly "Frexit" and a return to the franc as France's functional currency, are certainly outside the mainstream of Continental political thought. Her chances of victory seem quite low at the moment, but I'm not going to predict an election. Remember, though, that 76% of French voters selected a different candidate on Sunday, and just because the other main candidates have thrown their support to Macron--due to what in most cases is a visceral hatred of Le Pen--that doesn't give Macron a mandate to govern. This is especially true since his new En Marche! party currently controls only one seat in French Parliament. The Parliamentary elections, contested over two rounds in June, will be much more telling for the direction of France, but I'm guessing most U.S. commentators will have forgotten about France by then.
As of Monday's trading the benchmark French stock market index, the CAC 40, has risen 8.3% this year and 15.3% in the past 12 months. This would seem like a perfect time to execute the second half of the classic "buy on the rumor/sell on the news strategy." Macron can't outrun his legacy as one of the architects of Hollande's failed economic policies, and if the French stock market's ebullience has reflected hope for a real structural change in the French economy, I am afraid those buyers will be sorely disappointed. The micro should always outweigh the macro, though, and I'll have an update on Total and Sanofi, two French stocks I recommended after the horrible Paris jihadist attacks of November 2015, in tomorrow's column.
