Transport Infrastructure Underpins 2014 Growth Forecast

BMI View: Our estimates for a contraction in France's construction sector in 2013 have been reinforced by official data reporting negative growth of 2.7% in the first nine months of the year. The industry has been contracting consecutively since 2008 and we believe that the recession has continued in 2013 as a result of week macroeconomic recovery. Our Country Risk team estimates 0% GDP growth for 2013 and a slight recovery at 0.5% real growth in 2014. On that basis, we are also more optimistic towards 2014 when we expect the construction industry to return to low but positive growth at 0.5% in real terms supported by the development of transport infrastructure projects.

Seeing The Light In 2014?

We see some scope for a slight improvement in gross fixed capital formation (GFCF) in 2014 - a good proxy for construction and infrastructure - as household and business economic sentiment begins to pick up. However, major investments are likely to be capped by two factors. Fixed capital formation by large corporates is likely to be restrained by the uncertain business environment generated by the current administrations increasing hostile policy stance towards businesses. Such moves reduce the attractiveness of France as investment destination and may also impede the completion of planned infrastructure projects.

Six Years Of Consecutive Recession
Construction Industry Value (EURbn) & Real Growth (% y-o-y), 2007-2017f

BMI View: Our estimates for a contraction in France's construction sector in 2013 have been reinforced by official data reporting negative growth of 2.7% in the first nine months of the year. The industry has been contracting consecutively since 2008 and we believe that the recession has continued in 2013 as a result of week macroeconomic recovery. Our Country Risk team estimates 0% GDP growth for 2013 and a slight recovery at 0.5% real growth in 2014. On that basis, we are also more optimistic towards 2014 when we expect the construction industry to return to low but positive growth at 0.5% in real terms supported by the development of transport infrastructure projects.

Six Years Of Consecutive Recession
Construction Industry Value (EURbn) & Real Growth (% y-o-y), 2007-2017f

Seeing The Light In 2014?

We see some scope for a slight improvement in gross fixed capital formation (GFCF) in 2014 - a good proxy for construction and infrastructure - as household and business economic sentiment begins to pick up. However, major investments are likely to be capped by two factors. Fixed capital formation by large corporates is likely to be restrained by the uncertain business environment generated by the current administrations increasing hostile policy stance towards businesses. Such moves reduce the attractiveness of France as investment destination and may also impede the completion of planned infrastructure projects.

In addition, pressure on the government to reduce the fiscal deficit will limit the growth of fixed capital formation, as capital expenditure is generally one of the first components to be trimmed in austerity budgets. The limited progress towards fiscal consolidation suggests that government spending will continue to come under pressure in 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 that the country received from the European Commission in order to meet the target by 2015. Despite the extension, the government's ability to increase spending remains highly restricted.

There are also few signs of optimism in the housing market as banks tighten mortgage lending and household consumption continues to deteriorate. Although spending by households was surprisingly strong in the Q213, growing by 0.5% y-o-y against a contraction of 0.1% in the first quarter of the year, we noted this was largely due to higher energy spending. While French household consumption has historically proven relatively resilient to economic downturns - in part due to the difficulties businesses experience in shrinking the workforce, and also due to the state's generous social security system. Nonetheless, with unemployment now above the three million mark - bringing the unemployment rate to 10.5% - and unlikely to fall substantially over the near-term, the outlook for household consumption remains challenging.

In addition, France's consumer confidence outlook for the housing sector is not particularly encouraging. Households remain cautious about the economic outlook, indicating a reduced likelihood of big ticket purchases over 2014.

In terms of the public sector, President Francois Hollande's administration had suggested that there will be no austerity measures but we believe that in light of the weak growth outlook, he will have to push ahead with further spending cuts - especially as France's public finances come under increasing scrutiny from the European Commission. The cash-strapped government is already reportedly considering scrapping all but the most necessary projects. In addition, a policy of selective asset sales is being implemented by the government in order to free up resources to fund the most critical economic sectors. In July 2013, the government sold 4.7% of the capital of Aeroports de Paris (ADP) - the operator of Charles de Gaulle airport - to Vinci Group. This move followed the disposal of a stake valued at EUR707mn in European Aeronautic, Defence and Space Co. (EADS) in April 2013.

Meanwhile, the limited progress towards fiscal consolidation suggests that government spending will continue to come under pressure in 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 that the country received from the European Commission in order to meet the target by 2015. Despite the extension, the government's ability to increase spending remains highly restricted.

Slow Recovery
France Nominal GDP (EURbn) And Real Growth %

Opportunities Lie Ahead

The country's hosting of the UEFA Euro 2016 Football Championship could provide a source of new contracts for developers. The government launched an infrastructure stimulus plan in 2010 containing various measures, including EUR10bn of state guarantees to support public private partnership (PPP) projects. Under this scheme, the government is expected to support up to 80% of the financing behind infrastructure projects. According to the OECD, in 2011 seven projects were granted eligibility to State guarantee, for an aggregate amount of approximately EUR4bn. Projects include HSL-Tours-Bordeaux, Le Mans-Rennes, Nimes-Montpellier, CDG-X, Ecotaxe/HGV, MoD Balard, Premises, and Tram-Train Réunion (special priority has been given to the rail and road sectors). At present, the majority of these projects are under construction.

A second key set of measures involves the Caisse des Depots savings fund, which would be tapped over a five-year period to finance up to 25% of the total cost of concessions and PPPs, particularly in transport and renewable energy projects. In 2011, twenty projects were identified for over EUR3bn and eight projects were signed under this scheme. Furthermore, in September 2013 the Caisse des Depots signed several memorandums to develop social infrastructure, housing, public transport, utilities infrastructure, and renewable energy projects. Partners in these ventures include the Nord-Pas de Calais Regional Council, the General Council of the Nord, and the Lille Metropole Urban Community

Close to EUR25bn in transport PPPs and concessions is in the final planning/tendering stages in France, with another set of projects, worth EUR32bn, to be launched between 2012 and 2020. The pace of concessions and project financing has slowed down significantly since 2011, though the award of the concession for the Marseille L2 by-pass in May 2013 indicates that the pipeline is still alive. This concession award encourages our view that France's infrastructure industry - and especially the transport sector - will buttress growth in the construction sector in the longer term. We forecast real growth in the transport sector to average 7.1% a year between 2014 and 2022. If this plays out, the sector will account for 89% of total infrastructure industry value by the end of our 10-year forecast period. In turn, buoyed by growth in the transport segment, we expect the share of infrastructure industry value in the total construction industry to increase from an estimated 18% in 2014 to 25% by 2022. This will lead to average annual real growth of 1.9% in the construction sector over the period.

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Sector: Infrastructure
Geography: France
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