Natixis SA (EPA:KN) (OTCMKTS:NTXFY) believe the most worrying development in the French economy is the long-run decline in corporate profitability. An extrapolation of the trend leads fairly rapidly to an unsustainable low profitability despite the economic policies being implemented.
Decline in developments in the French economy
The various worrying developments in the French economy since the end of the 1990s are well known:
- Deterioration of cost competitiveness (Chart 1A) and foreign trade (Chart 1B);
- De-industrialization (Charts 2A and B);
- Excessive growth in government spending (Chart 3).
In the recent report Natixis SA (EPA:KN) (OTCMKTS:NTXFY) want to defend the following idea of the various negative trends appearing in the French economy. The decline in corporate profitability is probably the most worrying. It is affecting both industry and, to a lesser extent, the rest of the economy, and it has been a continuous process since the early 2000’s.
What outlook given the decline in corporate profitability in France
According to Natixis SA (EPA:KN) (OTCMKTS:NTXFY) there can be two scenarios:
- A scenario of major institutional reforms: greater freedom of wage bargaining in companies to achieve a fall in the hourly wage; a major tax reform; at the same time, support for a move upmarket in production;
- A crisis scenario with a sharp rise in corporate failures, a sharp decline in investment, and a recovery in profitability due, as in Spain, to the demise of the most vulnerable companies, and a fall in wages forced by the crisis.
1. Major institutional reforms
Of course, all policies capable of accelerating an improvement in the market positioning of the economy (funding of start-ups, tax incentives for research, etc.) are worthwhile. Regarding institutional reforms capable of restoring corporate profitability, the following could be considered:
- Greater freedom for bargaining between employers and trade unions in each company. Companies whose profitability is too low could negotiate a reduction in the hourly wage, for example in the form of an increase in working hours without any change in annual pay (Charts 8A and B);
- A tax reform consisting of a sharp reduction in companies’ social contributions (Chart 9) financed for example by a VAT hike up to the maximum permissible level of 25 percent (Table 3).
2. A crisis scenario
If no major institutional reform is carried out, the profitability of French companies will continue to decline, due to the insensitivity of real wage growth to unemployment, or to the loss of profitability itself (Charts 10A and B).
At an abnormally low level of profitability, the vulnerability of companies in France will become significant and there will be a sharp increase in defaults (Chart 11A) and a marked fall in investment (Chart 11B).
Conclusion: The urgency of reforms to restore the profitability of French companies
Without a labour market reform (a link between wages and profits), without a tax reform, after an improvement in 2014 due to the “CICE” corporate tax credit, the profitability of French companies will continue to decline, given the gap between the labour cost and the market positioning of production.
Since the level of profitability in France is already extremely low, both in absolute terms and relative to other countries, a further fall would someday lead to a solvency crisis for companies, a sharp increase in defaults, and a recovery in profitability by crisis mechanisms such as we saw in Spain.
It will therefore clearly be necessary in France to stop the distortion of income sharing to the detriment of companies, remembering that we are speaking of companies operating in France and not the large international corporations.