The recovery gathers speed once more in France

After a disappointing growth rate in Q1 of 2010 [0.2%], the French Statistics Office INSEE recently reported that French GDP grew 0.6% in Q2 on the previous quarter, suggesting that it is on the way to a comprehensive economic recovery. After zero growth in the first quarter, household consumption again increased –  0.4% in Q2. The consumer confidence indicator stabilised in July, compared to June, though it is still fairly low. Manufacturing production accelerated 1.3% on the previous quarter [0.6%] and 7.1% year-on-year, while inventory restocking [up 0.6%] has contributed considerably to GDP growth. After eight quarters of contraction, gross fixed capital formation increased 0.8% in the second quarter. However, exports have decelerated [up only 2.7% compared to 4.2% in the first quarter] while imports increased, driven mainly by demand for energy and consumer products.

The business climate indicators have continued to improve slowly. In July, electrical goods and machinery again recorded dynamic production figures with a low level of inventory. However, orders are also low and forecasts are less optimistic, while in the food and chemicals industries, production remains healthy with a low level of inventory and a good long term outlook for orders. Automotive and transport are still under pressure with low production and little improvement in orders, although inventories are also very low. Forecasts for production remain negative, with a similar outlook for rubber and metals. Pharmaceuticals have deteriorated with below average production levels and depressed order books. Services have stabilised, but with only average forecasts and less than dynamic demand - in particular for the hotel & catering subsector. The trend for the retail industry has deteriorated in the past 3 months with pessimistic forecasts for both activity and orders. Building and construction improved slightly in July, but orders and backlogs remain below average.

Credit issuance for the private sector [excluding financial institutions] continued to rise in July 2010 - up 3% month-on-month [after a 2.8% increase in June] and 2.8% year-on-year. Credit issuance for companies increased 0.2% year-on-year, whereas erosion of short term credit issuance continues [-8.6%]. Credit issuance for households grew 5.3%.

In terms of sectors, manufacturing and real estate recorded significant improvements in default rates in Q2 – down 24% and 23% respectively. Building improved 5%, but the situation remains critical for finishing activities. Retail recorded a slight improvement [3.5%], transport and food a small increase - 2% and 5% respectively -while defaults in the service sector have risen sharply [+15.8%].

A 10% decrease in insolvencies in 2010?

Based on the positive trend recorded in the first months of 2010, Crédito y Caución currently forecast a 10% decrease in business insolvencies this year, followed by a further 5% drop in 2011. In July 2010, the Expected Default Frequency [EDF] indicator in France fell 5 basis points - to 68 - reaching its lowest level since August 2008.

For the whole of 2010, Crédito y Caución forecasts French GDP to grow 1.4%. Corporate investments should increase 5% year-on-year while orders received will continue to benefit from foreign demand. Private consumption is expected to contribute positively to economic growth, but could be hampered by still high unemployment, despite the slight drop in the jobless rate [to 9.7%] in Q2 of 2010.