France: The first major reform should be enforced today – ING

Today, the labour market reform of France will enter into force which should support hiring intentions at a time when activity indicators are improving, explains Julien Manceaux, Senior Economist at ING.

Key Quotes

“Preliminary PMI data for September showed upbeat levels of activity expansion in France, both in manufacturing and services. INSEE also confirmed last week that GDP grew by 0.5% QoQ for the third quarter in a row in 2Q17.”

“The labour market reform should enter into force today. This is a milestone for President Macron less than six months after his election. His popularity has been decreasing fast (only 45% of the French still approve his policies, showing that Mr Macron lost the support he gained outside his own party before the elections) so he wanted this reform to be done as quickly as possible. It goes beyond Mr Hollande’s reform in several aspects. We believe for example that the ceiling on the dismissal compensations is an important step towards more labour flexibility and a real positive for permanent contract creations (the bulk of the employment growth is currently coming from short-term contracts).”

“We believe it will affect hiring intentions in the months to come and reinforce the current recovery, which is strengthening. Indeed, preliminary PMI data for September showed on Friday that French manufacturing activity continues to expand at its fastest pace in more than two years. The index increased from 55.8 to 56.0. This figure is a sign that the stronger-than-expected recovery in industrial production in 2Q17 (+1.2% QoQ after -0.2% QoQ in 1Q17) should continue in the second half of the year, pulled among others by the recovering building sector.”

“The picture, which last month looked less rosy, in the service sector is even more upbeat this time, with the PMI index rebounding from 54.9 to 57.1, recovering its level of the first half of the year. If sustained, it could translate into an acceleration in job creation in coming months. For the moment, employment growth – though improving – remains subdued and the number of unemployed in July has come back to their level of the summer of 2016. On that front, the second wave of protests Friday and Saturday (the first occurred on 12 September) showed a declining support for Mr Macron’s opposition. Unions are not all against the text, contrary to what happened one year ago with Mr Hollande’s reform.”

“All in all, the expanding activity in both manufacturing and services should continue to support growth in the third quarter. INSEE confirmed this morning that GDP grew by 0.5% QoQ for the third quarter in a row in 2Q17, with annual GDP growth reaching 1.8%, its highest level in six years. Given the continuing strength in soft indicators in 3Q17, growth could reach 0.4% QoQ this quarter, which would lead to a stronger-than-expected rebound in 2017. French growth – having slowed down from 1.2% in 2015 to 1.1% in 2016 – could then rebound to 1.7% in 2017. Afterwards, if the new Government can take profit from the accelerating recovery to implement reforms, GDP growth could accelerate towards 1.8% in 2018. This would help its public deficit reduction strategy, which is still under Brussels’ scrutiny, as the European Commission signalled last week.”