The possibility of a French recession is not exactly new: even the venerable Economist penned an an extensive article – with a humorous cover – over a year ago describing just such a possibility (the French were unamused). Yet to this date, not only has France managed to avoid the dreaded “Triple Dip” but its bonds continue to be well-bid, with the yield on the 10 Year well inside the US, at only 2.53%, nearly 1% below the wides seen in 2011. However, and especially now that Hollande’s 75% millionaire tax has finally been enacted, the fuse on the baguette time bomb is getting shorter.
As GaveKal’s Francois Chauchat rhetorically asks, “Is every country in Europe recovering, but France? This is the question raised by a third consecutive month of disappointing French manufacturing Purchasing Managers Indices (PMIs), which plunged to 47 in December even as the eurozone-wide PMI expanded to 52.7, a 31-month high. Such a large divergence is peculiar, since France and eurozone PMIs have historically been aligned. It could be that
France’s recovery is just a bit more painful and taking that much longer—but what if the real story is that the country is slipping back into recession?
Judged by the PMI surveys alone, and the economy indeed looks to be contracting, a pretty worrying development since the rest of the advanced economies are firmly in growth territory. Another recession would suggest that socialist President Francois Hollande’s targeted high tax agenda has hit a wall, and that a messy revision in economic policy, possibly preceded by financial market pressure, could be in store.
The divergence between France and the rest of Europe can be seen vividly on the European PMI chart below:
So a French recession would be a bad thing, right? Well, yes – for the French population, and certainly whatever is left of its middle class. However, as has been made clear repeatedly, in the New Normal in which only the trickle down effects from the wealth effect of the 1% matters, what the broader population wants and needs is hardly high on the list of priorities of the central planners. What does matter are stocks. And it is the wealthiest 1% and the stock market which, in keeping up with the old bad news is good news maxim, that may be the biggest beneficiary of a French triple dip.
The reason, at least according to GaveKal and increasingly others, is that a French re-re-recession would be precisely the catalyst that forces the ECB out of its inaction slumber and pushes it to engage in what every other “self-respecting” bank has been doing for the past five years – unsterilized quantitative easing: an event which the soaring European stocks have largely been expecting in recent weeks and months.
Quote GaveKal:
But even if the country is slipping back into recession, it is not clear that the “French tail risk” would reignite a broader euro financial crisis — a fear that has been raised repeatedly in the past few years. Would not a shockingly weak French GDP number rather increase pressure on the European Central Bank to act, weaken the euro and push Hollande to deliver more quickly and efficiently on his new pledge to regain business confidence? If this is what a still very hypothetical new French recession produces, not much lasting damage would be done to eurozone financial markets. Rather the opposite.
And there you have it: spinning bad economic news as more hopium for market bulls, and in fact setting the stage when the latest surge in risk assets just happens to coincide with that negative French GDP print, an outcome predicted by BNP two months ago, and an outcome which Draghi and the other ECB doves and which the Hawks on the ECB will theatrically complain about, but in the end, do nothing as usual. And with Merkel incapacitated, well: vive la recession!
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