Current economic developments

By Pierre Sicsic

In France, the gross investment rate of non-financial corporations is trending upwards, and was half a percentage point higher in 2016 than its previous peak of 2007-2008. However, after deducting capital depreciation, the net investment rate, which corresponds to the increase in productive capital, was one percentage point lower than its 2008 peak and equivalent to its mid-2000s level. The acceleration in depreciation stems from the increase in both capital per unit produced and in the average depreciation rate, which is itself linked to the greater share of intangible assets in investment.

Chart 1: Real gross and net investment rate in France (NFCs-IEs approximation) Sources: National Accounts tables 6.302 and 6.462. The nominal investment rate of NFCs was 23.3% in 2008 and 2016, table 7.101.

By Marie-Élisabeth de la Serve, Sophie Haincourt, Clément Marsilli

Less than two months after the adoption of the Tax Cuts and Jobs Act, which cut individual income tax and corporate tax, US Congress passed a budget agreement that increases public spending for 2018 and 2019. The effects on the US economy represent a two-edged sword: an additional 1.4 percentage point of GDP over two years, but a widening of the trade and budget deficits to 4% and 6% of GDP respectively. The recent dollar depreciation may reflect the growing concerns of international investors

Chart1 – United States: federal budget balance and economic cycle since 1960 Sources: Data from the Bureau of Fiscal Service, Bureau of Labor Statistics and CBO; authors' calculations.

Bruno Cabrillac and Francesco Pappadà

New cross-country evidence shows that VAT compliance is pro-cyclical, and its response to tax-rate hikes is sizeable and negative. Countries with highly sensitive tax compliance have a low ability to reimburse their debt, thus facing higher default risk. Issuing GDP linked bonds may protect such countries from the combined, cyclical risk of growing debt-to-GDP ratios and declining tax revenues.

By Yannick Kalantzis and Camille Thubin

The share of the manufacturing industry in French GDP has fallen by 9 percentage points over the past forty years. This decline is mainly due to technical progress and consumer preferences. Foreign trade has only played a minor role.

By Guillaume Gaulier and Jean-François Ouvrard

The upturn in economic activity in France has been accompanied by an acceleration in imports. This dynamism reflects the opening up of economies and the cyclical nature of components of demand. Over the medium term, a one-euro increase in demand generates no more than 0.33 euro of imports (their share in GDP); but import growth of two to three percentage points of GDP since mid-2016 remains difficult to explain.

By Clément Mazet-Sonilhac and Jean-Stéphane Mésonnier

In France, the cost of equity (CoE) faced by non-financial corporations increased sharply during the 2007-2009 and 2011-2012 crises, driven by a surge in the equity risk premium. The COE indeed measures the return required by an investor to acquire or retain a share given its risk. It has often exceeded the return on equity (RoE) since 2007. Since 2016, the CoE has been lower than the RoE for the large listed French non-financial corporations; this encourages productive investment.

Since the vote on Brexit, the UK economy has shown resilience. However, due to the historically low level of savings rates, investment uncertainty and inflationary risk, we can ask ourselves whether the current growth model of the UK economy is sustainable over the short term.

By Simon Ray, with Denis Fougère and Rémy Lecat

The boom of the 2000s in France stimulated investment by firms with significant real estate holdings (positive collateral channel). Conversely, it was unfavourable to investment by younger firms, with fewer holdings, because of the induced cost (negative profit channel), which justifies the current attention given to the financing of SMEs.

Eric Monnet and Camille Thubin

Unlike other forms of investment, construction investment in France has still not returned to the levels seen before the 2008 crisis. The drop in construction activity had a significant negative impact on French employment and GDP growth up until 2016. In the case of housing construction in particular, despite a recent upturn, unfavourable demographic factors could again place a drag on investment growth going beyond 2017.

The surge in Chinese corporate debt, against the backdrop of declining industrial profitability, is worrying for financial stability in China and beyond its borders. However, the risk of a banking crisis appears to be contained at this stage, although we should remain vigilant.