Fathom’s Economic Sentiment Indicators (ESIs) distil information contained within numerous consumer and business surveys into composite measures of underlying sentiment. Over the past six years, sentiment in Germany has consistently been above France. Therefore, it is notable that in March the French ESI moved above the German ESI. The divergence in sentiment continued in August with Fathom’s German and French ESIs at -0.1% and 0.5% respectively.
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With a larger share of output produced in the manufacturing sector and a larger share of this output being exported, Germany is more exposed to fluctuations in global economic activity.
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Recent weakness in global trade, particularly in autos, has been the main factor contributing to Germany’s slowdown in growth. GDP growth has averaged 0.1% over the last four quarters. But the impact on France, which is more service sector oriented, has been less pronounced, with GDP growth averaging 0.3% over the last four quarters.
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It is not clear how France’s economy will develop in the longer term. In order to maintain that economy’s recent performance, the French labour market will need to become more flexible. Since July 2008, unemployment has been higher in France than in Germany, and the gap between the two has been increasing. Emmanuel Macron has attempted to combat this, starting in 2017 with the announcement of labour market reforms to support France’s small businesses. The reforms decentralised the collective bargaining process for smaller businesses and reduced the legal costs of dismissing employees by placing a cap on compensation for unfair dismissal. It is too soon to judge their success, but Emmanuel Macron will be hoping that they will be as successful as the German ‘Hartz reforms’ in the early 2000s. German unemployment is now at a record low level of 3%.
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Even if these reforms are successful, France’s economy has further long-term problems to overcome. Government debt is still at an elevated level while the budget has been in a primary deficit since 2002. This contrasts with ample fiscal space in Germany with government debt at around 68% and a primary surplus since 2011. While low rates have eased the burden of interest payments on new French government debt, there are questions over the country’s ability to provide fiscal stimulus in the next economic downturn. Meanwhile, the opposite problem is plaguing Germany. With ample fiscal space, the government have appeared unwilling to renege on their ‘Schwarze Null’ balanced budget policy that prevents their deficit from exceeding 0.35% of GDP. However, there have been suggestions that the government may attempt to use a ‘shadow budget’ to circumvent national debt rules.
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