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Euler Hermes, the world's leading credit insurance company, drew on its 23 French regional offices to interview more than 1,000 French small-medium enterprises (SMEs) and large businesses about their investment intentions, cash flow status and January-April 2017 order books. The fourth edition of the annual investment barometer, against the backdrop of France's macroeconomic environment, provides an exclusive analysis of the current situation facing French companies, and of the demand and investment outlook for the next five years.
Household consumption will be the main driver of the French economy in 2017, contributing 1.1 percentage points to GDP growth, and is expected to increase by 2.1 percent in 2017 and by 2.3 percent in 2018 (+2.3 percent in 2016). French households are regaining confidence (the index is at 100, its best level since May 2007).
Household investment is expected to increase by 3.6 percent in 2017 and by 4 percent in 2018, after +2.4 percent in 2016, in line with the upturn in the construction sector. Public investment will also be a strong element from 2018. It is expected to increase by 2 percent from 2018, after -0.7 percent in 2017 and -0.1 percent in 2016. "All the components of investment are there,” underlined Stéphane Colliac, Euler Hermes France chief economist. “After an increase of 2.8 percent in 2016, total investment is expected to accelerate to +3.2 percent in 2017."
For businesses, the renewed demand is welcome. Turnover in non-energy industries is expected to increase more rapidly in 2017 and 2018 to 2.2 percent (+1.3 percent in 2016), also driven by higher inflation (+1.1 percent in 2017 after 0.2 percent in 2016). On the other hand, corporate margins have stagnated at 31.4 percent for the last two quarters, while the impact of support measures (CICE) and cheap oil has diminished. Economic policies will have been major factors in the business investment upswing, which accelerated in 2016 (+3.6 percent), supported by the additional amortization measures which contributed up to half of the performance.
The lifting of the uncertainties surrounding the French Presidential election led Euler Hermes to raise its French growth scenario from +1.4 percent to +1.5 percent in 2017, and from +1.3 percent to +1.5 percent in 2018.
"Apart from confidence, the President's economic program should generate business investment through more demand, a fiscal countershock and a public investment plan," said Ludovic Subran, chief economist at Euler Hermes. “First, the substitution of employee contributions with a 1.7 point increase in the CSG, and exemption from housing tax of 80 percent of the French population should support demand. And the reduction in corporation tax from 33.3 percent to 25 percent and the 6-point drop in employer social security contributions should boost margins. Finally, the five-year public investment plan of 50 billion euros makes it unlikely to return to the level of 85 billion euros recorded in 2012. Moreover, the public deficit continues at more than 3 percent of GDP (3.2 percent in 2018).
"Ultimately, business investment is expected to increase to +2.9 percent in 2017 and +3 percent in 2018. Despite this improvement, the investment gap remains difficult to absorb: it is 38 billion euros1, versus 40 billion euros in 2015. At the current rate, it would take 15 years to catch up," concludes Ludovic Subran.
1This investment gap is based on the difference between the total amount of investment by businesses in the economy at the end of 2015 and the amount calculated on the basis of a quarterly growth assumption in investment of 0.7 percent, similar to the 2006 rate. This was 83 billion if using 1 percent or the 2000-07 trend. (Euler Hermes Barometer 2015).
Half the respondents cited pressure on prices as the main risk to their profitability. The threat is most prevalent in the automotive (66 percent) and construction (55 percent) industries.
Only 18 percent cite lack of activity, compared to 23 percent in 2015. Order book visibility is also better. "The average visibility of companies has improved from five months in 2015 to 6.4 months in 2017,” confirms Stéphane Colliac. “Some 35 percent of French companies believe they have more than six months visibility on their order books, compared to only 24 percent two years ago."
When it comes to investment spending, companies remain concerned about market openings. For nearly 9 out of 10 companies, the outlook for domestic demand or exports is an important (or very important) determining factor for investment spending trends (75 percent in 2015). Additional factors include the renewal of production tools (54 percent, versus 73 percent in 2015), the company's level of indebtedness (17 percent, versus 53 percent in 2015) and financing conditions (16 percent versus 47 percent). The latter has improved markedly.
Among the companies surveyed, cashflows have consolidated in 2017: 93 percent declared that they had stabilized or improved their cash flow. They do not report any specific financing issues, in line with the current low cost of bank financing, and rather restrained payment periods are confirmed by 8 out of 10 companies. Euler Hermes estimates that the cumulative cash available in the treasuries of large non-financial companies was around 355 billion euros in 2016. It remains a very high level and further increased by +3 percent compared to 2015.
With returning demand and strengthened treasuries, French companies are demonstrating an increasing trend towards investment. "In 2017, 2 companies in 3 will invest at least as much as in 2016 (59 percent in 2015),” observed Hubert Leman, member of the Euler Hermes France Executive Committee and director of Risk Information. “Ultimately, 32 percent of French companies plan to increase their investment efforts compared to 2016."
Only 28 percent of French companies are not operating at full capacity; hence the desire to invest more to meet additional demand. "In all, 53 percent of companies surveyed favor aggressive investment: increases in production capacity, launching new business, R&D expenditure, external growth - versus 50 percent of companies in 2015. The service sectors (65 percent) and consumer goods (63 percent) seem the most aggressive about investment, perhaps compelled by the digital revolution," concludes Ludovic Subran.
Euler Hermes is the global leader in trade credit insurance and a recognized specialist in the areas of bonding, guarantees and collections. With more than 100 years of experience, the company offers business-to-business (B2B) clients financial services to support cash and trade receivables management. Its proprietary intelligence network tracks and analyzes daily changes in corporate solvency among small, medium and multinational companies active in markets representing 92 percent of global GDP. Headquartered in Paris, the company is present in over 50 countries with 5,800+ employees. Euler Hermes is a subsidiary of Allianz, listed on Euronext Paris (ELE.PA) and rated AA- by Standard & Poor’s and Dagong Europe. The company posted a consolidated turnover of 2.6 billion euros in 2016 and insured global business transactions for 883 billion euros in exposure at the end of 2016.
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