France: Risk Assessment

Country Rating¹

Rating: A2

Business Climate Rating¹

Rating: A1

Risk Assessment²

Economic recovery in 2010 driven mainly by domestic demand
Private consumption, steady throughout 2009 and 2010, has underpinned the economy during the crisis thanks to cushioning mechanisms and stimulus measures. The upsurge in consumption benefited almost every economic sector in 2010, particularly food, clothing, and catering/hospitality. After growing strongly in 2009, spurred by the introduction of the scrapping incentive, new vehicle sales sagged slightly in 2010 with the incentive losing some of its luster. Investment only began to improve in the second quarter last year and the trend has been relatively uneven since then. The recovery has also been fueled by a technical factor: a reduction in the proportion of sales companies made from stock. Although exports contributed to the economic rebound in 2010, the net contribution of foreign trade to GDP growth was slim with consumption mainly benefiting imports.

An acceleration of growth expected in 2011
Economic growth is expected not only to accelerate this year, but also to become more balanced, which will particularly benefit investment. GDP grew strongly in the first quarter compared to the fourth quarter last year, driven in particular by stronger consumption (a rebound in spending on services and the good performance in manufactured product sales.). Corporate investment spending increased markedly especially in information-communication. Public administrations also invested more as a result of the recovery in spending on construction. Variations in stock levels also provided a strong boost to economic activity. Conversely the trade balance deteriorated as a result of the rebound in imports. The pace of the recovery appears to have peaked in the first quarter and growth will likely slow for the rest of the year reflecting the tightening of fiscal policy (prompted by the need to limit growth of public-sector debt estimated at over 80% of GDP), the expiry of the scrapping incentive (whose residual effects were very noticeable early in the year), the slower growth of foreign trade, and a relatively strong euro. High prices for oil, food, and raw materials will also undermine consumer purchasing power and inflate production costs for companies.

Loss of market share
High corporate debt and low cash flow do not augur well for a significant increase in productive investment. Financing conditions remain difficult. Corporate bond risk premiums have increased and credit flows remain below pre-crisis levels, with bank feebleness primarily affecting smaller companies. There is a general lack of corporate innovation and companies are not exporting enough, due more to lack of ambition than competitiveness issues. With little presence in emerging countries, they take insufficient advantage of the economic dynamism in those markets. Despite the contraction of profit margins, industry has lost market share.

Improved payment behavior and an easing corporate bankruptcy trend
After initiating a decline, payment incident index continued to ease to a very low level notwithstanding a slight increase in late payments in construction, traditionally the sector where defaults are most likely to occur. In general, companies have managed their cash positions and stocks more effectively and reduce their payment times in the framework of the economic modernization law. They have benefited moreover from extensive public support (industrial support fund, credit insurance aid mechanisms). The corporate bankruptcy rate has remained high, however, compared to the years preceding the crisis. But the trend has been clearly towards easing since September last year. The decline in the number of bankruptcies reached 4% for the full year in 2010 and 5% for the 12-month period ending 30 April 2011. And the reduction in the cost of these failures to suppliers, which has trended down since autumn 2009, has been even more substantial. The decline reached 15% year-on-year through end April this year after reaching 22% in 2010, reflecting the sharper fall in bankruptcies for large and very large firms than for very small companies. Six sectors will bear watching: distribution, services to private individuals and services to groups (where bankruptcies have continued to rise), means of transport, B2B services, and media & leisure, which suffered a significant downturn. Public works, which contributed nearly 1/3 of business nationwide and was one of the fastest-growing sectors during the crisis, has taken part in the general decline thus far.

Strengths

• Quality of infrastructure and public services
• Good demographics
• Relative energy independence
• Top world tourist destination
• Number two agricultural power
• Competitive international groups (energy, environment, pharmaceuticals, luxury goods, food, distribution)
• Dynamic population growth, qualified workforce, high productivity

Weaknesses

• Relatively small contribution of exports to corporate turnover
• Limited presence of French companies in emerging regions
• Lack of effort to promote innovation
• Weakness of small and medium businesses
• Low youth and senior employment; high youth unemployment
• Deterioration of public finances