2019: France still better than you think

We said:

The impact of one-off drags on domestic demand is fading. Surveys signal more consumption and investment to come. While data remain mixed, the stock market points to resilience.

Our long-held view that the aggregate euro area (EA) economy was headed for a sharper and more prolonged slowdown than many expected is now consensus. But the importance of a nuanced approach to the analysis of major EA countries remains largely underappreciated. France and Spain are cases in point. In this note we develop an argument we’ve been making for being relatively bullish on France.

Like elsewhere in the EA, risks to growth are mounting in France, but the outlook is still positive. Against the backdrop of a further slowdown in the rest of the EA (especially in Germany and Italy, which could even contract in real terms), France’s outlook appears quite rosy.

Interestingly, the stock market provides a key to sifting through contradictory cues. French large caps have underperformed small caps since January. But small caps, which rely much more heavily on domestic demand, have done even better. So, this time, if you are not sure which data series is the most reliable indicator of what is happening to the French economy, just trust the stock market.

Outcome:

The French economy continued to outperform German growth. Despite the CAC falling 3.9% from date of publication to 28 August 2019 it has outperfomed the DAX (-5.8%), IBEX (-6.2%), MIB (-6.2%) and Eurostoxx 50 (-4.3%).

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