Noble Apex eNewsletter Issue 819- French reform momentum still continues

2019-08-01 06:26
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29 July 2019 Issue 819

Global Market Commentary


  • United States: US GDP growth in the second quarter fell to 2.1%, which was higher than economists expectation (1.8%) though. For the entire week, the Dow rose 0.14% to 27,192.45. The S&P 500 index rose by 1.65 percent to 3,025.86. The Nasdaq rose 2.23% to 8,330.21 points.
  • Europe: British new Prime Minister Johnson told German Chancellor Angela Merkel that he would like to amend the Brexit agreement. Over the week, the UK’s FTSE 100 index rose 0.54%, the German DAX index rose 1.30%, and the French CAC40 index rose 1.04%. The STOXX 600 index rose 0.90% for the week, to 390.73 points.
  • Asia: The Bank of Japan was reported to be able to cut its inflation forecast for this fiscal year, and some officials at the Bank of Japan were skeptical about the effect of forward guidance. Over the week, the Nikkei 225 index rose 0.89 percent to 21,658.15. The MSCI Asia Pacific Index fell 0.59% to 159.99 points.


  • United States: US President Trump threatened France, saying US would take a “significant reciprocal action” against the new digital tax plan which targeted US technology companies. For the whole week, the US 10-year bond yield rose by 0.02 basis points to 2.07%.
  • Eurozone: Italian bonds fell as manufacturing data was lower than expected. For the whole week, the German 10-year bond yield fell by 0.05 basis points to -0.378%.


  • Oil Price: Markets worried more supply threats in the Middle East than the dropping global demand. Over the week, New York oil futures rose 1.02% to close at $56.20 a barrel.


  • USD: The White House economic adviser Kudlow said the Trump administration did not want to suppress the dollar exchange rate. For the entire week, the Dollar Index rose 0.86% to 98.01.
  • China: US trade representatives put pressure on the WTO challenging China’s ‘developing’ country status. For the whole week, the yuan rose 0.02% against the US dollar to 6.789.


Economic-related News

  • United States: US Trade Representative Wright Heze and Treasury Secretary Mnuchin will travel to Shanghai next week to hold economic and trade consultations with China from July 30.
  • United States: Mnuchin said that a strong dollar was good for the US economy in the long run, and would not advocate a weak dollar policy in the short term.
  • United States: The US House of Representatives passed a budget bill to suspend the debt ceiling and submit it to the Senate.
  • Eurozone: The European Central Bank decided to keep interest rates unchanged. ECB expected that interest rates would remain at current “or lower” levels until at least the end of June 2020, which opened up room for a possible rate cut in September.
  • Eurozone: British Prime Minister Johnson said the current version of the Brexit agreement could not be approved by the parliament and must abandon the Irish backstop plan. However, this request was rejected by the EU.
  • Eurozone: The British Foreign Secretary said that in response to Iran’s seizure of British tankers, the UK and European allies would launch a joint operation to protect Persian Gulf shipping as soon as possible.
  • Japan: Japan’s consultation period for moving South Korea out of the white list ended last Wednesday. Trade conflict between the two countries might be escalated.
  • Japan: Bank of Japan Governor said that the uncertainty of global economic growth prospects was being closely monitored by officials, and the central bank promised to “continue to promote strong monetary easing” to increase inflation rate to 2%, the target level.
  • Japan: The Bank of Japan was reported to lower its inflation forecast for this fiscal year.
China Market Commentary
Economic-related news
• Chinese regulators say that there are too many trading venues to resolutely prevent the risk of financial asset trading venues.
• TCCTV pointed out that the Central Reform Commission called for strengthening the protection of intellectual property rights and establishing a comprehensive network management system.

French reform momentum still continues

French President Macron has been in office for 2 years, and the French reform has achieved initial results. Although the “Yellow Vests” campaign has damaged Macron’s international reputation, reforms continue to improve the long-term structural fiscal deficit. The balance of political power is conducive to the momentum of French reform, but it still has a long way to go.

French economic reform achievements

The achievements of French economic reforms are reflected in taxation and employment. In terms of taxation, the burden shifts from companies and employees to wealthy retirees, tobacco and fuel. At the same time, the government increases the flexibility of the job market, reduces the influence of trade unions and improves the effectiveness of the social welfare system. Finally, the government launched a five-year investment plan of 57 billion euros, accounting for about 2.5% of GDP.

These measures have been recognized by the international community. In the April OECD report, reforms in the next 10 years will increase economic growth potential to 3.2%. The fiscal account of 2018 continued to improve during the tenure of Marcon. The deficit rate was 2.5% in 2018, a decrease of 0.3% from 2017. By reducing public spending and increasing the quality of the collection, the structural deficit rate also fell slightly by 0.1% to 2.3%.

Concession “Yellow Vests” has not changed its reform direction

In November 2018, a sudden “Yellow Vests” crisis caused the government to make major concessions. Among them, the government slowed down the pace of fiscal consolidation. Between December 2018 and April 2019, the government announced fiscal measures of more than 15 billion euros, resulting in a 2019 French fiscal deficit that could soar to more than 3%. The “Yellow Vests” crisis has subsided in the past few months, and Macron’s support rate has rebounded by 30%, after falling to 18%. At the same time, in the European Parliament elections, Marcon’s party scored 22.4%, exceeding market expectations.

However, in the past few months, the government has initiated several rounds of economic reform measures. At the end of May, the parliament approved the reform of the civil service retirement system, and the recruitment of public administration departments was diversified. In mid-June, the French government announced a new program for unemployment benefits reform. The bill prevents people from frequently using short-term contracts to obtain unemployment benefits and reduce inefficient fiscal expenditures. More importantly, the French government announced pension reforms in July with the goal of the same current 40-plus pension scheme. The reform plan will improve the long-term deficit problem in France. The program is expected to be submitted to the parliament for voting early next year.

Risk lies in potential social unrest

The balance of power helps the French president to use the majority of his party’s parliamentary seats in the parliament to pass the economic reform program he advocated. However, Mark Long did not expand the mass base of his elections, meaning that his views were rejected by most people. The pension reform plan at the beginning of next year is the key to the sustainability of the reform trend. According to current opinion polls, about 47% of people hold negative opinions on reform. Once a new social unrest breaks out, the government may be forced to reinstate additional public spending plans to meet the will of the people. This will lead to a further increase in the deficit level.

In summary, the French reform measures in the past few years have improved the domestic economic problems, which has helped its economic growth potential to recover from the gap between Germany and Germany. Even if Macron is able to get support in a new round of government elections, the current voter base is not enough to make Macron promote large-scale economic reforms.

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