Another Contraction Forecast, But Timid Recovery Coming

BMI View: We expect a seventh consecutive year of contraction in France's construction industry in 2014, when we forecast -1.2% real growth. This represents a slight recovery from the -2.1% we saw in 2013, indicating that the worst may be over for the industry. In this context, it is our view that transport infrastructure projects will lead a return to positive construction industry growth from 2015 onwards.

Challenging Macroeconomic Environment Remains

Despite our view for a return to growth in France's construction industry in 2015 on the back of low base effects and a more positive economic outlook for France and the eurozone, the risks to our forecasts lie to the downside. Major investments in the short term will remain limited as large fixed capital investments in new factories, offices and commercial space are postponed until there is a more positive business environment prevailing.

Industry Recession To Continue
Construction Industry Value LHS And Real Growth RHS (2008-2018)

Another Contraction Forecast, But Timid Recovery Coming

BMI View: We expect a seventh consecutive year of contraction in France's construction industry in 2014, when we forecast -1.2% real growth. This represents a slight recovery from the -2.1% we saw in 2013, indicating that the worst may be over for the industry. In this context, it is our view that transport infrastructure projects will lead a return to positive construction industry growth from 2015 onwards.

Industry Recession To Continue
Construction Industry Value LHS And Real Growth RHS (2008-2018)

Challenging Macroeconomic Environment Remains

Despite our view for a return to growth in France's construction industry in 2015 on the back of low base effects and a more positive economic outlook for France and the eurozone, the risks to our forecasts lie to the downside. Major investments in the short term will remain limited as large fixed capital investments in new factories, offices and commercial space are postponed until there is a more positive business environment prevailing.

Activity in the housing market is set to continue to disappoint, as the outlook for French households did not improve significantly over Q114, with unemployment continuing its steady ascent to record highs. The labour market remains exceptionally weak, real wage growth is barely positive and house prices look set to decline further this year, while credit conditions have not substantially improved. With unemployment unlikely to fall substantially over the near-term, the outlook for household consumption will remain challenging, supporting our bearish view for the residential construction sector in France.

In addition, pressure on the government to reduce the fiscal deficit will limit the growth of government investment in infrastructure. The so far limited progress towards fiscal consolidation suggests that government spending will increasingly come under pressure over 2014, as France struggles to meet the target of maintaining a budget deficit no higher than 3% of GDP. This is in spite of the generous two-year extension which the country was granted by the European Commission in order to meet the target by 2015. Despite the extension, the government's ability to increase spending remains highly restricted and we believe that the current government's suggestion that there will be no austerity measures is increasingly unfeasible - with infrastructure projects rumoured to be already under consideration for cuts.

Timid Economic Recovery
France Nominal GDP (EURbn) And Real Growth %

Risks To Forecasts

The main upside risk to our forecast is a scenario whereby the French economy strengthens at a more rapid rate than is anticipated by our Country Risk team. If this is the case, stronger private sector-led construction activity would help to ensure stronger sector real growth. However, this scenario remains highly unlikely. The falling popularity of President Holland reflects the ineffectiveness of his traditional policy approach in addressing France's new economic realities. Polls suggest the president himself is regarded as an incompetent and divisive leader who lacks authority. The president's failure to restore economic growth and investor confidence in the market is a key factor preventing any significant recovery in the construction industry in the near future.

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