After 0.5% GDP growth in the last quarter of 2009, France recorded a rather disappointing growth rate in Q1 of 2010 [0.1%] confirming that the French economy still has a long way to go on its path to comprehensive economic recovery. As Crédito y Caución expected in previous analysis, private consumption has levelled off as a result of lower state subsidies and the gradual phasing out of the car scrappage scheme. Household consumption of manufactured goods declined 1.9% in the first three months of 2010, and this negative trend continued in April [-1.2%], as car purchases fell further. The French economy has been supported by manufacturing production and especially by buoyant exports, which increased 3.9% in the first three months of 2010, driven by higher demand from Asia and the United States.
In May 2010, food, electrical, machinery, chemicals and plastics recorded improved production figures, stabilised or decreasing inventory levels and increasingly optimistic production forecasts, thanks to improvement in orders. Automotive and transport recorded disappointing figures with a decrease in production, heavy inventories and a low number of orders: hence forecasts are pessimistic. For services and retail, the situation has stabilised in May with low positive forecasts.
The slight rebound in credit issuance that we noticed at the end of 2009 has continued into 2010, with a 1.2% increase in the value of loans granted by the end of March. For the small and medium-sized segment, credit issuance increased 3.7%, and for real estate companies the increase reached 5.4%. Nevertheless, short term credit issuance has continued to fall [-8.8% in February and -7.7% in March 2010], albeit more slowly. While the danger of another major credit crunch seems to be receding, there are still warning signs that weaker companies will face difficulties in financing their working capital requirements.
Improved domestic payment behaviour
According to the latest Crédito y Caución studies, the improvement in French payment behaviour has been more evident since the last quarter of 2009, with the government respecting its commitment to pay invoices within payment terms, and the building sector in particular improving its payment practices. This improvement has been further boosted by the effect of the Companies Modernisation Law [Loi de modernisation de l´economie], a government initiative designed to invigorate the French economy. As they learn the lessons of the credit crisis, French companies are now focusing even more on optimising their working capital requirements, and that includes strengthening their credit management procedures and their accounts receivable follow-up.
According to INSEE, the number of corporate insolvencies increased 7.1% year-on-year in 2009. In Q1 of 2010, insolvencies decreased 0.5% year-on-year. Those most affected were newly established and small companies, with less than 10 employees and turnover less than 500,000 euro, while the number of medium and larger business failures has improved. This positive trend could be explained by a general improvement in French companies´ liquidity, coupled with a restoration of margins and operating profits. Indeed, businesses´ liquidity is believed to be near its long term average.
Recently, the OECD revised its forecast for French GDP growth in 2010 upwards to 1.7%. The IMF revised the GDP growth up to 1.5% in April. Corporate investments will remain low, and are expected to increase only 2.6% in 2010. The main uncertainty is private consumption, which could remain under pressure as lower state subsidies, austerity measures [tax increases] and higher unemployment reduce consumers´ purchasing power. However, currently private consumption is still expected to show a small growth in 2010.
Some important sectors, like the chemicals industry, showed strong resilience to the crisis, with an insolvency trend that remained below average in 2009. Since the end of 2009, insolvencies in this sector have continued to decrease. The first five months of 2010 saw a consistent improvement in production, with chemicals the most dynamic sector within manufacturing. Inventory levels are very low, and global export orders have constantly improved. The volume of production is expected to increase 5.5% in 2010 and to recover completely from the crisis in 2011.
Other sectors, like building and construction and public works sectors, showed again a deterioration in the first quarter of 2010, with a decline in production and low level of new orders. On the one hand Crédito y Caución noticed an improvement in payment behaviour in winter 2009/10 compared to winter 2008/09. On the other hand, the insolvency rate continued to increase 2.5% year-on-year in the first quarter 2010, in contrast to the overall decreasing trend for France.
Sellers should pay attention to the size and age of a buyer company, as most bankruptcies affect companies younger than 3 years old and with less than 3 employees. Subsectors like individual housing and building finishing remain highly sensitive. The Credito y Caucións short term outlook for the construction sector remain pessimistic, due to the low level of orders and pressure on prices.
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