The recession is over in France

With a GDP growth of 0.3% in the third quarter, the recession has technically come to an end in France. However, the recovery will be modest for at least three months.
Analisis Credito y Caución
Madrid - 11-jan-2010

With 0.3% GDP growth in the third quarter, recession has technically ended in France. French exports have benefited from the rebound of international trade, and manufacturing production increased by 3.3% in Q3 of 2009 compared to the previous quarter. New industrial orders increased by 8.7%, driven by higher demand from abroad (+14.2%), and for automotives by 36%. That said, the quarterly level of new industrial orders was still 15.3% lower than a year ago, according to INSEE.

Private demand remains dynamic, with household consumption of manufactured products increasing by 2.4% in September and by 1.1% in October. Unemployment has stabilised in Q3 of 2009, at 9.5%. Purchasing power is expected to improve by 2.1% in 2009 thanks to a low inflation rate and state subsidies.

Overall, French industry still suffers from production over-capacity, with a usage rate bottoming out at just 71%. Capital expenditure is expected to show a decline of 22% in 2009, and corporate credit growth was negative in the three months to the end of November. In October the volume of corporate loans dropped by 24% year-on-year. This trend is even more dramatic for short term loans, but consumer credit and housing loans have stabilised, thanks to lower interest rates.

According to the latest Crédito y Caución survey, some 66% of French companies assessed domestic payment behaviour as poor or fair. Overall, French companies evaluated foreign payment behaviour more favourably than domestic payment behaviour. In summer 2009, the average payment term in France was 38 days, compared to 46 days in winter 2008/2009. Corporate insolvencies are expected to peak in 2009, with nearly 68,000 judgements, a 17% increase on 2008. Almost all sectors are affected, except food and agriculture. The French Expected Default Frequency increased slightly (by 2 basis points) in October 2009, after eight consecutive months of improvement. The EDF remains above its long-term level, indicating high default risk among listed companies.

Spotlight on industries: Automotive and Retail

Since autumn 2008, the French automotive industry has suffered from massive destocking and restructuring of production capacity. However, in Q3 of 2009, we noticed positive signs with an increase in automotive production of 20% compared to the previous quarter. Car sales increased by 20% in October, and since the beginning of the year, the car market has improved by 4%. But it should be borne in mind that the main stimulus for this development is the temporary car scrapping scheme. For the next 6 months Crédito y Caución expect a slight decrease in automotive production. The expected end to state subsidies in 2010 has pushed sales artificially upwards during recent months. But, despite a positive third quarter, orders received fell by 8% in September. Foreign demand will remain a key element, but the European market is expected to decline by 10% in the first quarter of 2010.

Delayed payments in the transport and automotive industry increased by 0.5 days in Q3 of 2009, reaching, on average, 13.6 and 11.5 days respectively. The default rate is higher than the national average of 1%, at 1.9%.

Regarding Retail, the sector has shown some resilience to the crisi. After a worrying summer, private consumption increased by 2.4% and 1.1% in September and October respectively, an encouraging sign for the last quarter of 2009. Subsequently, while turnover in the retail sector remained flat in the first half of 2009, it has increased by 0.8% in the third quarter. Despite overall positive developments, insolvencies in the retail sector increased by 13.4% to 3,500 judgements in the first half of 2009.

Sellers should pay attention to the history and high street position of the company and its capacity to offer a dedicated service that can compete with e-retailers. Within the sector, housing and telecommunications are dynamic, whereas mail order companies are encountering severe difficulties. The Crédito y Caucións short term outlook is positive for the last quarter of 2009 but rather neutral for the beginning of 2010. Although we notice some positive signals, such as an increase in private credit lending coupled with low interest rates, rising unemployment and the increasing savings ratio will affect private consumption in early 2010.

The modest recovery continues

We can see the start of a recovery, but it will remain modest for at least the coming three months. The IMF expects French GDP to contract by 2.4% in 2009 and rebound by 0.9% next year. Corporate investments will remain low in 2010, with a forecast decrease of 3% in the first quarter of 2010, as the focus will be on maintaining rather than increasing production capacities.  Private consumption may decrease slightly in 2010, as a result of higher inflation and lower state subsidies. Foreign demand should stay dynamic, but the strength of the euro against the dollar may affect French competitiveness and exports. We estimate that corporate insolvencies will continue to increase in 2010, albeit at a much slower pace than in 2009 around 2%.

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