Macronomics hits speed bump

PARIS — After the surge, the sputter.

Last year, as Emmanuel Macron swept to power pledging business-friendly policies, Frances economy zoomed ahead to post growth of 2.2 percent.

This year, even with signature Macron reforms such as a rewrite of the labor code and the partial elimination of Frances wealth tax taking effect, things arent looking so good.

Budget Minister Gérald Darmanin has backed away from the governments earlier projection of 2 percent growth for the year. He told parliament earlier this month the figure would not be less than 1.8 percent.

The slowdown doesnt necessarily mean Frances economy is headed for big trouble under Macron. Economists say it will take years for many of his reforms to have an effect. But it risks causing political problems for the centrist president as he gears up for next years European Parliament election, with opponents accusing him of failing to tackle the root causes of Frances economic troubles, such as high welfare spending.

A return to the low-growth doldrums of his predecessor François Hollande would strike at the core of Macrons allure.

If the economy struggles, that will also tarnish Macrons image as the EUs golden boy just as he is seeking to persuade other countries in the bloc to follow his recipes for economic reform, notably in overhauling the eurozone.

Lackluster performance lurks in a variety of recent indicators.

Unemployment trended slightly upward this year to 8.9 percent, after making a remarkable improvement (dropping from 9.7 percent to 8.6 percent) in 2017. Frances trade deficit stood still in the first six months of 2018, rounding out at €34 billion, as it did one year ago.

But most alarmingly, GDP growth slowed to an anemic 0.2 percent clip in the first and second quarters, calling into question the economic renaissance envisioned by Macron, an ex-investment banker who told the global economic elite at Davos earlier this year: “Nobody can suspect me of not being business-friendly.”

Laurent Wauquiez, leader of Frances conservative Les Républicains | Bertrand Langlois/AFP via Getty Images

A return to the low-growth doldrums of his predecessor François Hollande would strike at the core of Macrons allure, which has promised renewed prosperity in exchange for liberalization of the welfare state.

It would also add another vulnerability to a president already trying to fend off accusations that he is out of touch with normal people and considers himself above the law — a charge exemplified by the Benalla affair, in which his ex-bodyguard dressed as a police officer and assaulted protesters.

Macrons opponents have been quick to target the economy as a potential weak spot. Laurent Wauquiez, the leader of the conservative Les Républicains party, accused the president of failing to get to grips with public spending.

“Because there have been no savings in public spending, Emmanuel Macron is obliged to dip into the pockets of the French people. And thats been one of the main reasons for my opposition during the past year,” Wauquiez told France 2 television in May.

Waiting game

Experts caution, however, that Macrons reforms should not be judged on the first six months after they came into effect. Frances National Institute of Statistics and Economic Studies (INSEE), in an email to POLITICO, called those policy changes “rather long term,” and said changes would be significantly felt only after 2018.

Jean-Philippe Vincent, an economics professor at Sciences Po university in Paris, said it could take even longer — at least two years — for the governments policies to feed into economic growth.

Vincent said that last year, as confidence surged on the back of Macrons election defeat of far-right leader Marine Le Pen, France tapped into a reservoir of “delayed growth” that had accumulated during the underwhelming Hollande years. “Today, those reserves are spent,” Vincent said.

SNCF was affected by industrial action earlier this year | Bertrand Langlois/AFP via Getty Images

He said the current fundamentals of the French economy suggest a long-term annual growth rate of 1.2 percent.

A range of external and internal factors have also made life more difficult for the French economy.

After notching up 2.5 percent growth in 2017, the eurozone only anticipates an expansion of 2.1 percent in 2018. Moreover, the eurozone managed just 0.4 percent growth in the first and second quarters of this year, deflating demand for French goods and services.

And although Macron has pushed through labor reforms and faced down strikes, industrial action still weighs on economic performance. INSEE said picketing campaigns, which in 2018 notably encumbered Air France and national railway SNCF, could have shaved as much as 0.1 percentage points off second-quarter growth.

“The impact of a U.S. trade war and Iran sanctions will adversely affect the French economy” — Saam Golshani, Paris-based lawyer

French officials have also cited higher oil prices and trade tensions with the United States as drags on the growth rate.

Not all see the situation pessimistically, however.

“Our view and feedback from our clients still show a surge in investment confidence,” said Saam Golshani, a Paris-based lawyer for industrial companies and investment firms. Golshani said Macrons reforms would positively impact GDP in the long term but also cited the risks caused by external factors.

“The impact of a U.S. trade war and Iran sanctions will adversely affect the French economy,” he said. But he added that another external factor — Brexit — could result in a net gain for France if financial services companies shift operations across the Channel.

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