Wednesday 10th February 2016
NEWS TICKER: KPMG has appointed Adrian Stone as its UK head of audit with immediate effect, succeeding Tony Cates who now leads KPMG's international markets and government practice. Stone joined KPMG's Sheffield office in 1984 and has been an audit partner since 1997. He previously held several senior roles in KPMG's audit practice including head of audit for the north of England and Scotland, chief operating officer for the UK audit practice, head of internal audit and head of KPMG's department of professional practice. He has been KPMG's interim head of audit since November last year - Bridge Bank says it has provided faith based Spark Networks with a $10m revolving credit facility - BNP Paribas Securities Services has been appointed by Sampo Group, the Finnish financial services group, to provide global custody and settlement services for Sampo’s €25bn of insurance assets held globally - Saudi Arabia is reportedly reconsidering the requirement for foreign companies setting up in the country to have a local partner. A committee led by the Saudi Arabian General Investment Authority, the Ministry of Commerce and Industry and the Ministry of Labour, will look at ways to spur additional inward investment into the realm, according to newspaper Asharq Al Awsat. The committee is expected to ease the bureaucratic barriers for foreign firms that want access to the Saudi Arabian economy. Foreign direct investment is vital as the kingdom looks to make up foreign exchange losses and balance its $98bn budget deficit – European president Donald Tusk met with Georgian premier Giorgi Kvirikashvili today. Discussion focused on continued reforms of the Georgian judiciary, rule of law and human rights are important priorities and I underlined the EU's readiness to assist. It is crucial that criminal investigations and prosecutions be evidence-based, transparent and impartial, in line with the commitments of the Association Agreement. “I share Georgia's concerns about the continued implementation of the so-called “treaties" between Russia and Abkhazia and South Ossetia. I saw for myself the situation at the administrative boundary line, including the "borderisation" [sic] process, during my last visit to Georgia,” said Tusk following the meeting. The European Union will continue to give its firm support for the territorial integrity of Georgia within its internationally recognised borders.” - February 9th 2016: The Polish Financial Supervision Authority (KNF) at its meeting today confirmed the appointment of Małgorzata Zaleska as President of the Management Board of the Warsaw Stock Exchange, following her appointment as president on January 12th. Zaleska is the director of the Institute of Banking, Warsaw School of Economics; the Chairperson of the Committee of Finance Sciences of the Polish Academy of Sciences; a member of the NBP Economic Research Committee; a member of the Central Commission for Degrees in Finance – Today’s equity markets tell a tale of fears of a global slowdown with even the US considered a candidate for recession. The US session yesterday was not pretty, with the S&P500 down 1.42%. The index has lost around 9% of its value this year and is now 13% below the nominal high that it reached last year. The DJIA was down 1.1% and Nasdaq100 fell 1.59%. The Nasdaq100 is now 17.92% below the nominal high that it reached last year. Swissquote says: “The sentiment is risk-off at the moment, with gold reaching $1,200 for the first time since June. Gold’s bullish momentum continues yet commodity linked currencies such as the AUD and NZD failed to gain the advantage as outside precious metals and other commodities broadly fell. In particular, WTI Crude is now back around below $30 a barrel over continued oversupply concerns. Markets are now fearing that this period of lingering low oil prices could last a long time”. – In the Asian session Japanese stocks fell more than 5% and the yield on the benchmark government bond dropped into negative territory for the first time. The decision by the Bank of Japan to introduce negative interest rates looks to have pushed down yields for both short and longer termed bonds. In afternoon trading in the Asian session, the benchmark 10-year government bond was yielding minus 0.025; in other words, investors were willing to lend the over-indebted Japanese government money for 10 years and get back less than they put in. Remember that Japanese sovereign debt is more than double the country’s GDP. The question is now, how far down can yields go? Moreover, when will central banks stop flirting with negative interest rates. It is a dangerous policy. The stock market took the brunt of investor fears today, as the Nikkei Stock Average closed y down 5.4%, falling 918.86 points to finish at 16,085.44. This is a sizeable drop and the largest one-day fall for about two and a half years. Yet again, the yen did well, rising against the US dollar to 114.80. Financial shares took the brunt of today’s pain with Mitsubishi UFJ Financial Group Inc. (MTU) shares closing down 8.7%, and Nomura Holdings losing 9.1%. Australia's S&P/ASX 200 ended the session 2.9% lower, and New Zealand's S&P/NZX 50 was down 1.3%. India's Sensex was 1.2% lower. Chinese, Singapore and Korean markets are closed today. In Europe, equity futures are mixed. The CAC40 has dropped 0.22%, the DAX is down 0.21% while the FTSE100 is unchanged, but there’s still half a day’s trading to go.

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The European Review

By Patrick Artus, chief economist at Natixis

France’s industrial crisis: predictable and set to last

Friday, 03 August 2012 Written by 
France’s industrial crisis: predictable and set to last France’s industrial sector is in the midst of a steadily worsening crisis. There has been a decline in production, employment and productive investment, the external deficit remains significant, and export market shares are declining rapidly. We would argue that this situation was foreseeable, particularly if we add up issues with supply, domestic and external demand, and the impact of the eurozone crisis. Unfortunately, not a lot can be done about the weakness of demand, and the remedies to the supply problem are difficult to implement rapidly. http://www.ftseglobalmarkets.com/

France’s industrial sector is in the midst of a steadily worsening crisis. There has been a decline in production, employment and productive investment, the external deficit remains significant, and export market shares are declining rapidly.

We would argue that this situation was foreseeable, particularly if we add up issues with supply, domestic and external demand, and the impact of the eurozone crisis. Unfortunately, not a lot can be done about the weakness of demand, and the remedies to the supply problem are difficult to implement rapidly.

Let’s go through these issues, their causes and their implications.

Cause no. 1: The supply problem



Supply conditions for goods and services continue to deteriorate in France. The low profitability of companies discourages investment hence the production capacity of French industry is on the decline.

Since 2001, French industry sales prices have been falling relative to unit wage costs. Such falls reflect the excessive level of unit wage costs compared to the sophistication of industrial production in France. The downmarket nature of French industrial production prevents an increase in its selling prices, because of the high level of the price elasticity of demand for industrial products made in France: 0.9 versus 0.3 in Germany.

However, the rise in the unit wage cost – relative to selling prices – does not come as a result of the trend in productivity, but what has been happening to wages. This is because the level of costs is pushed up by the level of employers’ welfare contributions.

The subsequent fall in French industry’s profitability is substantial, reducing its capacity to invest and create jobs. This leads to the off-shoring of production capacity to countries where industrial profitability is higher, thereby weakening industry financially and threatening it with a serious crisis in the event of a recession and falling demand.

Cause no. 2: The demand problem

Between 2011 and 2012, French industry suffered from the weakness of both domestic and external demand. This resulted in a lower capacity utilisation rate than normal, which makes the problem of low profitability even more detrimental. And the decline in demand may deteriorate further if there is a fall in real wage incomes and government expenditure.

Cause no. 3: The euro-zone crisis

The eurozone crisis has two negative effects on French industry:

  1. it weakens demand and therefore imports in the eurozone countries that usually would have been France’s customers. This is significant because the eurozone accounts for 46% of French exports – the United Kingdom, which is also mired in a recession, accounts for 6%;
  2. it reduces domestic demand and capacity utilisation rates in Spain and Portugal and persuades industrial companies in these countries to turn to exports. As wage costs are lower in these countries, there is an increase in the competition that has a direct impact on French industry. France’s export market share tends to decline, whereas those of PortugalSpain and Ireland have recovered.

Remedies are very difficult to implement

Of the three issues mentioned, weakness of demand and the effects of the eurozone crisis cannot be controlled, particularly in a situation where there is private-sector deleveraging and a reduction in fiscal deficits. The question for French industry is therefore which remedies can be implemented on the supply side? We have put together the following list of possible measures:

 

  • an improvement in the sophistication of industrial production and in the differentiation of products, which will require innovation, investments, and marketing;
  • increased geographical diversification in companies' sales to increase the weight of emerging countries, which is currently quite low in France;
  • a major reform of the financing of social welfare in France to reduce the weight of welfare contributions paid by companies;
  • a fall in the hourly labour cost, either through a fall in the per capita wage, or through an increase in the number of hours worked (which is obviously a source of conflict).

 

However, these measures are all very difficult to implement rapidly.

It is also important to understand the major fragility of companies that are not very profitable (i.e. they have a shortfall in supply) when they are faced with a significant and lasting decline in demand.

Unfortunately, it looks as though this French industry crisis is not going to go away any time soon.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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