Consumer confidence figures sent mixed signals in September
Consumer confidence continued to decline in September, from 96.3 to 94.1, its lowest level in 30 months. It is mainly consumers’ appraisal of the economic outlook that declined, going back to its April 2016 level and affecting also fears for their own financial situation. It seems that the move has been provoked more by external developments like a possible trade war with the US or a no-deal Brexit than by domestic events. Indeed, fears of unemployment have declined in September, even if they remain more elevated than at the beginning of the year and consumers still feel confident in their ability to save. Moreover, purchasing intentions increased in September, which could translate into somewhat better retail sales figures in the fourth quarter. We currently believe that consumer confidence should stabilize in the coming months. Indeed, on one hand, the 2019 fiscal package will be positive for the purchasing power. However, on the other hand, more worrying signs coming from the labour market could affect confidence further (see below).
Consumer confidence level in September, the lowest since April 2016
Bad summer for unemployment
The last unemployment figures showed that the number of unemployed increased by almost 30k in July and August, double what was measured last year in the summer. Overall though, the unemployed population increased by less than 10k so far in 2018, against 43.3k in 2017. The figures are blurred by the end of subsidized job contracts (30k so far in 2018) which are not fully compensated by new contracts. However, this should not hide the fact that employment growth has taken a hit in the second quarter, slowing down from 1.9% a year in 4Q17 to only 1.3% in 2Q18 in the private sector. For the unemployment rate to drop below the 9% threshold before the end of the year as scheduled, we will need to a strong rebound in the coming months. Given the weakening of sentiment in the service sector, it is currently hard to look for a strong rebound.
The 2019 budget is favourable for private consumption
As each year in September, the French government presents its budget for next year. For 2019, President Macron wanted to make it clear that increasing consumers’ purchasing power was at the centre of his policy. Minister Darmanin called it “the largest drop in household taxes in ten years”. Several measures will contribute to that, for €6bn or 0.3% of GDP, €3.8bn of that coming from the disappearance of the housing tax for 80% of households. This should affect in particular the middle-class and more than compensate for the effects of rising tobacco and oil prices. This is also the main reason why we believe that private consumption should rebound by 1.6% in real terms in 2019 after only 1.1% and 1.0% respectively in 2017 and 2018.
Companies will also benefit from the electoral promise of a lower corporate tax, from 33% to 25%, at a cost of €2.4bn. The budget is also in line with France’ promises to Brussels after a disappointing 2018. Indeed, this year, the deficit should be 2.6% of GDP after 2.7% last year, yielding a structural effort of barely 0.1ppt. In 2019, the effort will increase to 0.3ppt of GDP, which is still well below the 0.5ppt requested by Brussels. However, it should be noted that in 2019, exceptional factors will bring the deficit up, as the equivalent of 1% of GDP in temporary corporate tax credits will become permanent expenditures. This explains why the deficit is scheduled to come down from 2.8% to 1.4% between 2019 and 2020, which would be the best budget since 2001. The trajectory is also in line with President Macron's electoral pledge of reducing public spending from 55.5% of GDP in 2015 to 54% in 2019 and less than 52% in 2022. However, to reach that, the reform of the public sector and its payroll will have to be completed.
In terms of public debt, it should be noted that the French railway network debt has been included in gross public debt computations (this €35bn amounted to a 1.3ppt increase to 98.5% of GDP for 2018, a projection recently made public by INSEE). Given the current deficit trajectory, the public debt should start declining as a % of GDP after 2019. However, in the meantime, financing needs will be elevated. The Treasury already announced that it will limit its issuance of long-term bonds to €200bn in 2019. This means that an unusual amount of short-term debt will have to be issued to cover the financing needs of 2019, which are currently estimated at €228bn, a record amount that is largely due to the temporary effects of the budgetary measures described above.