Tight finances trip up French firms' recovery role
By Leigh Thomas, ReutersPARIS--Squeezed by thin margins and high debt, French companies will struggle to ramp up the investment spending on which French President Francois Hollande's government is banking to underpin a fragile recovery.
October 28, 2013, 12:02 am TWN
Hollande's government has hung its 2014 recovery hopes on business investment taking over consumer spending's traditional role as the motor of growth in the eurozone's second-largest economy.
It expects growth to reach at least 0.9 percent in 2014, counting on a corporate tax credit scheme to boost overall business investment by 1.5 percent and even more for spending on new equipment even though spare capacity is ample at nearly six percentage points below the long-term average.
“It's all just political mumbo-jumbo,” said Pierre Vauterin, chief executive of CBA, which makes airplane parts outside Paris and employs about 65 people.
“I don't see any grounds to prophesy an investment rebound,” added Vauterin, who said his company's 2014 budget would focus what little investment was possible on improving quality and performance rather than boosting production.
Under the tax credit scheme designed to cut labor costs by 10 billion euros (US$13.8 billion) next year, the government sees average French operating margins rising to 28.7 percent from an estimated 28.2 percent this year. By 2015, it hopes to have cut labor costs by 20 billion euros or six percentage points.
But France has the weakest margins in Europe, and analysts say such improvements will do little in the short term to restore French profitability to levels enjoyed elsewhere in the eurozone, where the average operating margin is nearly 38 percent.
“There's a real problem with profit margins and this problem is going to hold back any recovery because there will be fewer means to invest,” Bank of France head of structural analysis Gilbert Cette said.
Forecasting 0.7 percent growth on average for next year, economists polled by Reuters are not too far short of the government's own 0.9 percent target.
But if any risks emerge to threaten that scenario, the corporate sector will struggle to pick up the slack. According to estimates compiled by Thomson Reuters, analysts see roughly flat capital spending by the 40 largest companies listed on France's CAC-40 index.
Surviving, Not Thriving
The weak profitability of French firms has meant they have taken on debt to try and maintain investment levels as much as possible, leading corporate debt to pile up to near record levels at close to 66 percent of economic output — a fact that further restricts room for maneuvering.
Though Spanish and Italian firms shoulder much bigger debt burdens, they have better margins, and Spanish firms for their part are deleveraging quickly. Spanish firms have cut debt from about 118 percent of GDP in 2010 to less than 100 percent now.
Though business sentiment surveys suggest optimism is rising among French firms, many executives remain stuck in a retrenchment mindset rather than in the mood for expansion.
Chief financial officers' top priority remains cutting costs followed by expanding margins through internal growth, according to a survey of 74 CFOs by Deloitte.
“Companies are going to try to scrape by next year by closely managing cash flow and investments,” Vauterin said, adding that he was careful to keep cash flow positive in order to steer clear of needing credit.
The phenomenon is visible from small and medium-sized firms like CBA, the aircraft parts manufacturer, right through to France's top groups.