News ID: 258771
Published: 1001 GMT September 16, 2019

Trade gloom drives French, German economic divergence

Trade gloom drives French, German economic divergence
FINANCIAL TIMES

A modern commercial estate converted from old warehouses and television studios in the Paris suburb of Aubervilliers may hold the key to understanding why France’s economy is outperforming Germany, the eurozone’s longstanding powerhouse.

In a modern office on the estate, 43-year-old entrepreneur Nicolas d’Hueppe’s digital start-up Alchimie is investing in more staff and in expansion abroad, ft.com wrote.

“Paris has become number one for start-ups,” said d’Hueppe, whose company aggregates, digitizes and curates video content on behalf of the rights-owners, creating new channels for telecom and television groups hungry for content to sell to viewers. “Today you can talk to British or American funds and they aren’t terrified.”

For years the German economy prospered as its companies benefited from growing global trade and freedom to export. France, with a much more domestically focused economy, was a laggard. But now the tables have been turned.

In an environment of increasing trade hostility, France’s strength in services and domestic consumption is proving a boon while German exports are suffering as a result of the country’s dependence on the Chinese market for cars and industrial equipment.

French companies such as Alchimie — with more than 100 employees and €40 million in turnover last year — are helping France to maintain an economic growth rate of about 1.3 percent a year, while Germany flirts with recession. And French unemployment — while still far higher than in Germany — is down to 10-year lows.

Alchimie’s growth is far from the only evidence that France is becoming more entrepreneurial while Germany stagnates. The number of French start-ups has been on a sharp upward trend for more than three years, while in Germany the numbers have been declining.

The contrasting fortunes of the eurozone’s two largest economies have much to do with their differing structure. Total exports account for 47 percent of GDP in Germany compared with only 30 percent in France.

“The Germany economy is tied in with the auto industry and the global equipment goods cycle,” said Michala Marcussen, Société Générale’s chief economist. “In France what you’ve seen is that consumers have been holding up well, but investment spending is also coming through.”

In August the French service sector achieved its strongest performance in nine months, with IHS Markit’s purchasing managers’ index reaching 53.4, its fifth consecutive month above the 50-point level that divides business contraction from expansion. Meanwhile in Germany, industrial production declined in July by a worse than expected 0.6 percent.

“Clearly there is no denying that there is a positive trend happening in France right now, but the decoupling is more about the weakness of the German economy than the strength of the French economy,” said Katharina Utermöhl, senior economist for Europe at German insurer Allianz.

German industrial production makes up 23 percent of the country’s economic value-added, compared with only 12 percent for France, Utermöhl said. The crisis-hit German carmaking sector — which has suffered a 12 percent annual drop in production — makes up 4.6 percent of economic added-value, compared with only 0.4 percent in France.

And their trade with China has diverged: While Germany’s capital goods exports have suffered from the slowdown in the world’s second-largest economy, French exports of luxury goods and consumer products have been accelerating.

Also, Paris and Berlin have taken different approaches to economic policy and reform.

French growth is sustained in part by €25 billion of extra spending and tax cuts announced by president Emmanuel Macron since last year to appease the gilets jaunes demonstrators — a move that scuppered earlier plans to slash the budget deficit but provided a well-timed stimulus in the face of the global slowdown.

Macron’s reform agenda could also help sustain France’s outperformance, some entrepreneurs and economists say.

Marcussen said France had made “important strides forward”, while for a change it was Germany that found itself in the spotlight among its eurozone partners: “It’s clear that Germany does need to do a number of reforms.”

Germany has so far rebuffed growing calls for a fiscal stimulus. “When you talk to entrepreneurs in Germany, they are not that optimistic about the political situation and that weighs on investment,” said Lorenzo Bini Smaghi, chairman of French bank Société Générale.

Sylvain Broyer, Emea chief economist for S&P Global Ratings, said: “For the first time in a quarter of a century, the investment-to-GDP ratio is higher in France than in Germany.”

This suggested that “Germany has rested somewhat on its laurels”, he added.

France’s outperformance may not last, however. Economists and businesspeople caution there is still a long way to go in terms of reform, and Germany remains an industrial superpower whose trade-related woes could prove merely temporary.

Marcussen predicted that France will not be able to resist the stuttering global economy forever. “When you get a global slowdown you tend to see that France slows down with a lag,” she said.

Another reason for French business leaders to hold back on the celebrations is that Macron is easing the pace of his reforms to avoid antagonizing voters ahead of local elections next March.

D’Hueppe at Alchimie nevertheless gives Macron credit for abandoning the hostile attitude to private business of some of his predecessors. Alchimie already has operations in Germany, Spain and Australia and is expanding further, planning to hire another 25 people this year.

“We are still French,” d’Hueppe said of the local business community, “but we are starting to have a bit of an Anglo-Saxon veneer — and it’s no longer considered exotic for an American fund to invest here.”

   
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