France : competitiveness and market shares
The cost competitiveness gap is slowly narrowing, but no market share gains for now.
1. France is showing symptoms of a competitiveness gap. These include the loss of share of French exports in world exports and the persistent trade deficit. They reflect poor export performances and robust imports. With very few exceptions, foreign trade has contributed negatively to growth in France since the early 2000s.
2. The roots of this competitiveness gap can be found in the adverse cost competitiveness trend, as reflected in the steady increase in unit labour costs (ULCs) since 2000, in particular in contrast to Germany. This disparity in ULCs is mainly due to wage trends.
There has, however, been a relative improvement in the cost competitiveness of French companies since 2012. Unit labour costs have risen at a slower pace in France than across the eurozone, which has played a role in the rebalancing of the labour cost trajectories in the region.
A vicious circle has therefore been created. To maintain their price competitiveness, companies have had to squeeze their margins, which has been a drag on investment, quality competitiveness and, ultimately, exports.
Margin squeeze is defined as the ratio of price competitiveness to cost competitiveness. A ratio above 100 implies faster growth in prices than in ULCs relative to the base year. Conversely, if the ratio is below 100, this means that ULCs have risen more quickly, and that exporters then had to squeeze their margins.
3. Support measures, such as the CICE (competitiveness and employment tax credit) and the Responsibility Pact, were put in place starting in 2014, with the aim of restoring companies’ margins and competitiveness. Additional support measures are planned for 2018-2022.
The financial statements of non-financial companies (NFCs) have therefore improved in the recent period. Since 2014, companies’ profit margins have recovered and profits have improved significantly. The profit margin of NFCs thus rose from 29.9% in 2013 to 31.7% of value added in 2017. This improvement was due primarily to the impact of tax measures (CICE and tax cuts) and only partially to the slowdown in unit wage costs.
Against this backdrop, there has been a fairly sharp recovery in corporate investment. Investment by NFCs rose for the fourth year in a row and the rate of investment exceeded its previous high in 2008.
4. However, despite these promising recent trends, French market shares within the eurozone have been slow to catch up.
After declining sharply in the 2000s, French market shares within the eurozone were relatively stable between 2008 and 2013 before eroding once again. Furthermore, the ability of local producers to meet domestic demand, as measured by the import penetration ratio for goods and services, is another indicator of competitiveness that has also been slow to improve.
Several reasons may be given to justify this continued poor export performance:
- The erosion of the French industrial base in the 2000s.
- The high concentration of the French export machine.
Furthermore, the results of the Coe-Rexecode “competitiveness survey” conducted in 2017 suggest that French products suffer from a poor price-quality ratio.
It should also be noted that, according to the European Commission’s composite indicator, France is not ranked among the top-performing countries in Europe in innovation, but is close to the average.
Ludovic MARTIN, Group Economic Research