China: confidence, price war and credibility are the watchwords in this early part of the year
After a break in the statistics as a result of the Chinese New Year, economic activity data for January and February was published last week. While some numbers surprised to the upside, starting with industrial production (up 7% year on year), buoyed by external demand (with exports up 5.6% in January and 8.2% in February), China remains in the grip of structural difficulties, particular in the real estate sector.
Confidence, or rather a lack thereof, is reflected throughout the economy: in retail sales (up 5.5% year on year in February, falling short of the consensus), private investment, imports (down 8.2% in February) and, above all, real estate indicators. Real estate is the main focus of concern: far from improving, key variables like housing starts, square footage sold and new construction have all deteriorated further in the early part of this year. With nearly half of all developers insolvent, the weakened real estate sector remains stuck in the first phase of its slow transformation: finishing projects already in progress and paid for that still offer a degree of profitability.
While the number of new construction projects has fallen 60% from its 2019 peak, average prices in major cities adjusted by a mere 6.3% in 2023. While this figure masks disparities between megacities that remain subject to strong demographic pressure (Beijing, Shanghai and Shenzhen) and other cities, it is indicative of the fact that the authorities are keen to regulate how far prices can fall, for three reasons:
A price war is raging in the electric vehicle market. Battery maker BYD, now a giant in China’s automotive industry, is on the rampage. In 2023, it replaced Tesla as the world’s leading EV manufacturer, making China the leading exporter of cars, ahead of Japan and Germany. Since the start of this year, BYD, which is financially stronger than most of its competitors, has cut prices on its entry-level models even further, with basic models now starting at under US$10,000.
This price war is dangerous. Of course, it helps consumers in the short term by stimulating competition. But with the Chinese economy already struggling with very low or even negative inflation, it comes at a time when domestic demand is weak. While inflation finally returned to positive territory in February (coming in at 0.8% year on year), this was mainly down to a favourable base effect and the Chinese New Year, which tends to give prices a boost in sectors linked to the festivities (transport, hotels, catering, etc.).
In the automotive sector, two conditions must be met before a price war can happen: the authorities must provide high levels of subsidies (both directly to manufacturers – for example for research and development – and to buyers) and manufacturers’ margins must come down. Because they are targeting export markets, particularly in Europe, where they can charge higher prices while remaining competitive relative to American and European brands, automotive manufacturers are willing to accept a short-term squeeze on their margins.
But the European Union appears increasingly reluctant to throw open the single market to Chinese EVs, despite the fact that European consumers could benefit from lower prices and such a move would push up EV penetration compared to that of dirtier combustion engine vehicles. The Commission has thus kicked off an investigation to establish just what level of state subsidies Chinese EV makers are receiving, the idea being to use this argument to condemn unfair competition and put in place further tariff and non-tariff barriers.
Such an offensive would be very bad news for the Chinese economy, which is more reliant than ever on its manufacturing industry, particularly the “new three” (electric vehicles, solar panels and batteries), to maintain its industrial capability and sell off surplus production that cannot be absorbed by a sluggish domestic market. In February, the cumulative 12-month trade surplus reached a new record, coming in well above $1 trillion (at $1.096 trillion).
Until the Covid crisis came along, this was China’s great strength. These past four years, though, what markets expect and what the authorities want seem to have been out of alignment. Markets were disappointed first by the shakiness of the recovery in early 2023 and second by what they saw as inadequate fiscal stimulus from the government. As a result, certain decisions (e.g. to support equity markets, which were beginning to fall too fast) were hastily announced, serving only to further stoke fears over the real state of the economy.
Total stimulus measures over the last three years have been far from derisory, though they pale into insignificance compared with the huge stimulus campaigns of 2008 and 2015. However, they have failed to convince investors and consumers, and it is perhaps this that marks the starkest contrast with the past and China’s remarkable ability to find the right levers to revive the economic cycle.
If you look closely, however, what the authorities are saying is consistent with what they are doing: prioritising not only political stability and deleveraging – particularly in local government, responsible for much excess in this regard – but also the role of central government, the public sector and, above all, the Party at the centre of China’s economic life. Perhaps the problem lies in markets’ refusal to accept this change.
China: Two Sessions, one growth target and a whole lot of questions
In a more or less unchanging sequence of events, the Chinese New Year has given way to the “Two Sessions” (known in Chinese as lianghui), which brings together over 3,000 representatives of the Communist Party of China and the National People’s Congress. This year, though, the sequence of events was not quite unchanging: it was announced that the premier’s traditional press conference, a rare opportunity for exchange – controlled but freer than usual – with the foreign press that had been held every year since 1993, would no longer happen. There had already been one break with tradition: Xi Jinping has still not convened the plenary session of the Party’s Central Committee, tasked with approving and ratifying economic reforms.
Li Qiang, appointed to the premiership in 2023, thus had the daunting task of delivering the general policy speech and presenting the government’s most recent priorities as well as announcing key economic objectives for 2024.
The first announcement was no small thing: just like in 2023, the official growth target has been set as “around 5%”. This time, though, China can no longer rely on a favourable base effect to help it hit this target. With doubts already swirling over the veracity of the official 2023 growth figure (5.2%), the decision to keep the target at 5% is a double-edged sword.
On the one hand, it sends a clear message to economic agents: the authorities believe the economy is back in gear after four challenging years, marked by Covid and then the real estate crisis and, more generally, a lack of confidence among consumers and investors, reflected in low inflation. On the other hand, in the absence of any more stimulus measures to help achieve it, the credibility of this target has been called into question, especially with the consensus (among international organisations and private financial institutions alike) seeing growth at around 4.5% rather than 5%.
The same goes for the inflation target, which is still set at 3% even though the only time inflation has exceeded this level in the last ten years was in 2019, when it was driven up by the pork crisis. While this indicator provoked less debate in previous years, the fact that China has entered into deflation – year-on-year inflation has been zero or negative since September 2023 – highlights the disconnect and raises more questions over the benefit of keeping the target so high when it’s perfectly obvious it won’t be achieved.
When it comes to diagnosing the economy, the message is clear and the risks recognised: declining external demand, insufficient domestic demand, overcapacity in industry, the real estate crisis and persistent over-indebtedness in local government. These deep fractures “built up over a long period”, the so-called Grey Rhinos – risks that are identified but inadequately prepared for – have ended up materialising.
When it comes to diagnosing solutions, however, the picture is less clear. Li Qiang promised that the focus in 2024 would be on consumption… an approach already used in 2023, without much success. In reality, the authorities believe neither in the power of a consumption-led recovery nor in its multiplier effect so dear to Keynesian economists. On the contrary, they fear that consumption might create generations of entitled layabouts at a time when young people, encouraged to “eat bitterness”, are often accused of not wanting to work as hard as previous generations. In reality, the problem in China goes much deeper and highlights the paradox inherent in the country’s economy: a communist regime with no social safety net. This is especially true for migrant workers, of whom there are an estimated 250 million, who work in cities but have no access to some social services (such as unemployment and health insurance).
This paradox is the driving force behind Chinese people’s preference for saving money rather than spending it – a preference further entrenched by three years of Covid and a downturn in the labour market, particularly for young people. The authorities thus fear that these fiscal measures, even if targeted at the lowest-income households, will be useless, merely serving to increase household savings or reduce household debt.
Also, while Li Qiang said fiscal policy would remain “proactive”, the deficit is set to remain at its usual level of 3% of GDP. On the other hand, the government still has some room for manoeuvre left over from last year: not all the support measures announced at the end of last year (notably to finance infrastructure able to withstand natural catastrophes) have yet translated into actual payments. On the monetary front, caution is the watchword after sharp cuts in various rates (base rates and the mandatory reserve requirement ratio for banks) over the past few months. With the US and the rest of the world yet to embark on monetary easing, China fears further capital outflows and a weaker yuan if the interest rate differential widens.
Li Qiang also highlighted growth in the private sector fuelled by both domestic and international private investment. With foreign direct investment flows at their lowest in over 20 years ($33 billion net, compared with $185 billion in 2023), China’s message that it is open for business is still struggling to feed through into tangible investor behaviour. Nor will the passage of the premier’s speech where he talked about “complete control over law and order”, indicating that national security will continue to take precedence over economic considerations, help matters.
Having in recent years marshalled the concept of “high-quality growth”, this time Li Qiang talked instead about “high-quality development”. He was referring here to the “Big Three” (electric vehicles, solar panels and batteries), which have replaced textiles, household appliances and furniture as China’s top exports and mean higher added value in Chinese supply chains. But these are also the sectors in which there is excess manufacturing capacity, which means external demand will be key.
Slamming “protectionism and unilateralism”, which have “gained ground”, China takes a very dim view of emerging discussions within the European Union over the introduction of barriers to entry for Chinese electric vehicles, and of the decision to investigate Chinese government subsidies in the industry. Chinese manufacturers are primarily counting on the European market to rebuild their margins.
As it did last year, China has announced a 7.2% increase in its military budget, which therefore once again exceeds its growth target. Yet China’s military budget – the world’s second highest after the US, at over $230 billion – continues to be underestimated: a big chunk of research and development expenditure, seen by China as civilian even though its results are mainly used in the military (especially in the field of cybersecurity), is not included.
Confrontations in the South China Sea have been more frequent over the last few months, particularly with the Philippines, locked in a dispute with China over control of the Spratly Islands. The ASEAN nations, which last week attended (apart from Myanmar, which was not invited) a joint summit with Australia, have condemned “unsafe conduct at sea and in the air” and “destabilising, provocative and coercive actions”. Another incident that same week left four Filipinos injured. It seems unlikely that peace is in the offing.
The Two Sessions concluded after a week of meetings that left few certainties and a whole lot of questions. One thing above all is certain: the Party and its leader Xi Jinping continue to tighten their grip, as foreshadowed by the decision to scrap the premier’s traditional press conference and confirmed by the passing of a law that says the government’s role is to “resolutely implement the Party Central Committee’s decisions”. This also means we should not expect to see any lessening of the emphasis on national security – something that might have brought some relief to the private sector, particularly in the field of new technologies. Meanwhile, most of the questions have to do with the management of economic policy. In choosing an ambitious target that exceeds consensus forecasts, the authorities could, in an effort to reassure markets disorientated by the last few months’ disappointing statistics, have been less tight-lipped about how that target is to be achieved. Instead, there have been few specifics about what kind of fiscal stimulus might be put in place, particularly in the real estate sector, still in the grip of a crisis. Far from being an exercise in transparency, the Two Sessions have only heightened the perception of an increasingly opaque China.
As India’s general election nears, Narendra Modi faces anger from farmers
Indian farmers are at the gates of New Delhi asking the government to raise the minimum floor prices of the cereals they grow and extend the mechanism to all crops. It’s not the first time this type of protest has erupted in India, where nearly half the population still makes a living from farming.
Between November 2020 and 2021, Indian farmers spent nearly a year camped out around cities demanding that a law that liberalised cereal pricing be scrapped.
This time around, with a general election due to be held between April and May, the issue is even more important. While there’s little doubt as to the outcome, which should see Narendra Modi’s BJP party return to power and Modi begin his third term as prime minister, Modi’s handling of the crisis remains critical to his public image. In 2021, a crackdown on protests resulted in nearly 700 deaths. The farmers eventually returned to northern India (to the states of Punjab and Haryana, India’s main producers of rice and wheat) with the promise that a review commission would be set up to look at nationwide minimum floor prices for harvests.
Two years on, with no decisions made, anger is growing again. It should be noted that inflation has not spared India, affecting first and foremost energy products, of which the country is a net importer (oil accounts for around 25% of total imports), followed by food products and particularly vegetables, with crops of the latter increasingly affected by climate change. Over the past three years, India has had to cope with increasingly unpredictable monsoons, the timing of which is critical to harvests, as well as intense heat waves. The upshot is that, despite strong growth (7.2% in 2022 and 6.3% in 2023), real wages have failed to keep up.
This is down to India’s extremely informal labour market (90% of workers have no employment contract) combined with its heavily rural population: in particular, farmers have little leverage with which to negotiate higher prices.
Despite the ongoing crisis in agriculture, fiscal policy remains focused on industry. Using India’s G20 presidency as a platform to attract new investors and promote India as an alternative to China, Narendra Modi has chalked up a few highly publicised successes, notably in the telephony field. Apple, Samsung and Google all now make some of their phones in India. Basic assembly lines have given way to more modern production facilities and the supplier network has expanded with the arrival of Taiwanese subcontractors.
Still a very protectionist country, India has embarked on a dual strategy of integrating itself into supply chains and substituting imports through the “Make in India” initiative, which aims to boost the share of manufacturing value added from 17% to 25% of GDP. Fourteen specific sectors, ranging from automotive to agri-food and electronics, are targets for public investment or tax breaks. However, the strategy is running into India’s shortcomings in infrastructure and logistics, especially compared with its rival China.
While China accounts for 14.7% of global exports, India accounts for only 1.8%, putting it on an equal footing with Vietnam. The existence of very high tariff and non-tariff barriers, the burden of red tape, endemic corruption up to the very top of government and the arbitrary nature of some public decisions all serve to dampen appetite among investors, who remain wary of moving into the country. Compared with its other Asian competitors (the Philippines, Malaysia, Thailand and, above all, Vietnam), India is let down by its relative lack of openness: businesses in the middle of supply chains, and thus liable to produce higher added value goods, are often hampered by the lack of adequate upstream industrial capability and difficulties importing the intermediate goods they need.
Investors interested in India are obviously not just looking for somewhere to put a production site: their eyes are on the country’s huge domestic market. India has dethroned China as the world’s most populous country but is still wrestling with endemic poverty, summed up by its inflation index: 50% of inflation is driven by food prices, which means food is often the largest item in household budgets.
While the industrial stakes – at the heart of the country’s medium-term development strategy – are high, Narendra Modi cannot long ignore the plight of farmers, who still make up the majority of India’s electorate. However, as the “world’s biggest democracy” prepares to go to the polls, it’s entirely possible that the prime minister could continue with his campaign of repression, which has curtailed freedom of expression and rights for some minorities while clearing the way for increasingly nationalistic and authoritarian rhetoric and measures. Against this backdrop, and with the opposition still struggling to organise itself into an effective alternative, farmers’ protests will more than likely continue to be repressed by force. When it comes to celebrating Modi’s future victory, tractors at the gates of New Delhi are presumably not part of the plan.
Geopolitics – Emotional warfare permeates us all: we should learn to understand it
Public opinion has always been one of the battlefields in power struggles. Now, though, thanks to a combination of geopolitical uncertainty and the "infobesity" (information overload) of what Joseph Nye called the Information Age, the role of public opinion is strategically more important. Who gets to decide who the enemy is? Governments or public opinion? The Global North or the Global South? Who will craft the new consensus in this in-between time when “the old is dying and the new cannot be born”? Who will define the issues that lead to clashes and division? Who will determine what constitutes an event and what does not?
ECO Tour 2024: the state of the French economy, sector by sector
Disruption to global supply chains and logistics as the Covid pandemic abated and disorder on global agricultural and energy markets after war broke out in Ukraine upset the economic cycle against the backdrop of an across-the-board surge in inflation.
These supply shocks have gradually subsided, with a bump in inflation followed by a downward trend as energy prices have fallen and food prices have stopped rising. However, the nature of obstacles to production has gradually changed. Economic activity stagnated throughout the second half of last year, hampered not by supply constraints but now by a perceived shortfall in demand, penalised by the past inflationary shock and monetary tightening.
This year, as disinflation continues and wages belatedly catch up, purchasing power and consumer spending – which will be the main drivers of growth – should pick up. However, not until the second half of the year and the first European Central Bank rate cuts will the investment horizon become clearer. Lacking drivers, growth is likely to come in at a paltry 0.7% in the eurozone and 1% in France.
The economic climate will continue to vary from sector to sector. Energy-intensive industries will continue to digest the energy shock and the ensuing persistent loss of competitiveness. As supply chain pressures gradually ease, some sectors such as automotive and aerospace are seeing production return to more normal levels and continue to offer some upside. Meanwhile, industrials and food retail still have to reckon with changing consumer habits: with consumers still worried about purchasing power, non-priority purchases could be deferred or shifted to cheaper retailers and/or product ranges. On the other hand, the tourist season – particularly in France, with the Olympics looming – looks promising. Lastly, the construction sector will struggle to get back on an even keel until interest rates and prices come down, enabling the property market to stabilise.
This scenario of a soft recovery remains entirely dependent on political and geopolitical risks and turbulence. In addition to the hotspots of Ukraine, the Middle East and the South China Sea, this year brings an exceptionally busy electoral calendar, with elections set to be held all over the world, culminating in the US election in November.
Geopolitical fragmentation is changing the grammar of country risk
Disordered geopolitical fragmentation is shaping the global scenario against a backdrop of US-China rivalry and an environmental emergency. That being the case, we are – and no doubt will be for some time – in a multipolar geopolitical moment: a moment when global coordination and concertation mechanisms are increasingly ineffective as each country – not only those in the Global South – seeks to play its own hand first. Every country will be seeking a new balance between conflictual and transactional approaches, between deterrence and one-off collaboration. Businesses are going to have to learn the grammar of this fragmentation, which will reshape the risk landscape going forward. What can we say about it for the time being?
Two core trends
Self-fulfilment – this tendency towards fragmentation/reconfiguration is happening all the more quickly because it has become self-fulfilling, for a number of reasons.
"Revisionist" actors' willingness to act is contagious. This is true not only because one conflict may divert attention away from another (Azerbaijan would not have had so much freedom to act if the world had not been so preoccupied with Ukraine) but also because the US, already very busy in its role as global policeman, has a hard time managing multiple competing fronts.
The accelerating pace of global rearmament is also liable to fuel a security dilemma in the most strategic regions, already in open or hidden conflict. The Red Sea has flared up and the South China Sea is white hot. The security dilemma is a spiral of actions that is set in motion when countries no longer trust each other and communication channels no longer work. In such situations, strategists may feel that the cost of taking action will increase as the opposite side steps up its deterrence, and may thus conclude that the enemy is likely to act first. Typically, these questions over the "window of action" are influencing the timing of events in the relationship between Taiwan and China.
The countdown to the US election is also forcing all countries to rethink their position and acting as a huge strategic accelerator – many analysts think a Trump win will change the game in key areas of global geopolitics. Some will wait; others will act. This issue of timing is crucial for Ukraine and Gaza.
The "geopolitics of strategic nodes" may also prompt many decision-makers (both economic and political) to move to act more quickly: any actor aware that it has in its possession a more or less unique strategic asset (such as a rare raw material or a geographical position from which it can control an essential flow) is now also considering whether that asset might now have a limited life span or even be neutralised altogether. For example, the Houthis are currently forcing many shipping companies to take a longer route, but how long will they be able to keep this up? Controlling a raw material undoubtedly confers more lasting influence, but cartel-based thinking will start to look tempting – and with it, the risk of volatility and relative price imbalances, as well as foreign exchange risk. Country risk will therefore evolve in line with the strategies adopted by the countries that control the new income streams arising from the climate transition.
Lastly, most strategic thought leaders (chief among them the IMF) are now adopting this idea of fragmentation as the basis for future thinking. But this near-unanimous analysis is itself a self-fulfilling factor! Widespread fragmentation – now very much the "in" word – is creating a free-for-all: when everyone is moving, those who stand still will be left behind.
What kind of fragmentation? The pace at which trade and investment are being reconfigured is not keeping up with military strategy or public opinion: in reality, it will be several years before we know how value chains have been redistributed; by contrast, it took Japan and Germany just a few months to lay to rest decades-old pacifist taboos. Similarly, while it is beyond question that the Global South is seeking alternatives to the dollar, unless there is an abrupt change in the perception of what constitutes a safe haven, de-dollarisation can only ever be a slow process; whichever geopolitical scenario plays out, the dollar's dominant position tends to slow the pace of monetary change. An example from another area: although it took years for the image of the American model of society to lose its lustre, things changed quickly once the idea of double standards took hold. This accelerating fragmentation of soft power has escaped neither India nor the Gulf States, keen to play their influence cards.
Geopolitical "fragmentation" is not a uniform phenomenon, then: fragmentation comes in various forms. Indeed, the timescales vary greatly depending on the domain in which the particular manifestation of fragmentation plays out. Trade, investment, military strategy, legal risk and financial risk are all subject to different constraints, dynamics and inertial forces. These timing differences will play an important role in the emergence of new geopolitical risks. They also explain diverging perceptions between, for example, economists and political analysts, or between the business world and military circles. Fragmentation narratives vary depending on where you are and what your role is.
In this chaotic in-between time, what do we know about the grammar of risk?
1 – The first rule of a chaotic world is that there can be abrupt changes of direction throughout the system (this is the principle that underlies the physics of chaos). For the moment, events have sparked conflicts – and, with actors potentially waiting to spring into action in every strategic corner of the world, there will be more conflicts to come. But there can also be surprises of a more positive kind. The slightest peace negotiation would make just as much noise as a war, especially given that all theatres of conflict are connected. So we should expect strategic surprises: scenarios will not play out in linear fashion.
2 – Who will drive the various scenarios? Who will steer and pivot them? This is an essential question. Indeed, while the violence of geopolitical events seems to give states the upper hand, we must not forget that the cycle over the past ten years or so has been driven first and foremost by politics: the crisis of democracy has also played its part in creating space for autocracies to emerge. Furthermore, domestic politics often prompt states – irrespective of the type of regime – to seek the legitimacy they lack at home in conflicts beyond their borders. The many elections due to take place this year remind us of this relationship between politics and geopolitics and will steer the global scenario, whatever long-term strategies states might adopt. Lastly, it must be noted that, over the past fifteen years, a steady tide of popular uprisings has upset power dynamics, with unexpected consequences (perhaps also because we tend to be blind to those things we don't want to see coming…). The Arab Spring movement was the first to highlight the effect of social networks on insurrections – something that has since been much studied – and, more broadly, on the mutation of politics in the deepest possible sense – a mutation that has since become steadily clearer.
So, for example, the geopolitical logic of expanding Europe to include Ukraine has now been called into question by European farmers, who are also denouncing all products covered by free trade agreements. Similarly, at the other end of the global chessboard, the Gulf States cannot ignore Arab public opinion as they consider their positioning on the conflict in Gaza, even though their priorities still include long-term transition plans in which the start-up nation of Israel plays an important part… If we are to correctly assess risk, then, we must always be thinking about both politics and geopolitics. Any strategy that focuses excessively on analysing state strategy alone is likely to end up overlooking political and social issues and dumbing down the nature of the current cycle.
3 – The second most fashionable word in the world of strategy today is multi-alignment. Countries are adopting this approach whenever they can, from India to Vietnam, Saudi Arabia, Thailand and Kazakhstan. But what is the practical impact of multi-alignment on businesses? In fact, multi-alignment creates both new opportunities and new risks. This risk/opportunity trade-off must be considered on a case-by-case basis – i.e. country by country and sector by sector. There are opportunities because states are all looking for new partners in strategic sectors such as, for example, the arms industry, which is benefiting as countries seek to become more autonomous in terms of military capability, with Saudi Arabia and India leading the way. But there are risks too: for countries in the Global South, multi-alignment soon runs into conflict with the compliance rules and sanctions that are a feature of western them-and-us geopolitics.
In parts of the world, then, economic warfare prevents business and banks having anything to do with certain states, or at least controls the relationships they are allowed to have with those states. In the rest of the world, though, pragmatism, domestic interests and transactional postures rein supreme. All this is not far from being contradictory (and, above all, disorganised) in what, after all, remains a globalised world marked by complex value chains in which flows cannot generally be traced beyond two or three levels of subcontracting. This contradiction stemming from the geopolitics of sanctions is only becoming more acute and inevitably gives rise to overcompliance and a higher risk of secondary sanctions. In every part of Eurasia that has a strong – and sometimes dependent – relationship with Russia, these contradictions remain unresolved.
4 – It has long been established that reputational risk has taken on new dimensions for economic agents as social media have cemented their foothold in civil society, and that businesses must increasingly take responsibility for their impact on society. The urgency of the environmental crisis and the accompanying public mobilisation have also taken reputational risk to new levels. And geopolitical fragmentation is now adding to this dynamic: reputational risk can now mutate into accusations of collaboration in war, or even genocide. Reputational risk has thus become existential for a company's image and takes a variety of forms, from business relationships to pure matters of image, through publications or even just comments made by employees. The scope of reputational risk as a component of country risk has steadily expanded over the past 20 years as it has become more or less impossible to control. In very practical terms, a country whose sovereign profile raises no particular concerns can nevertheless carry a very high level of reputational risk. An obvious example today is Israel.
5 – The only thing that appears certain amid this geopolitical chaos is that all countries are, more or less, seeking strategic control (for want of autonomy) over essential sectors such as food, fertilisers, water, pharmaceuticals, semiconductors, arms, etc. Working as closely as possible with these sectors thus appears to be a logical strategy in terms of opportunities. Here again, though, it is vital not to forget that behind these new opportunities lurk new risks. States can also use their desire for strategic autonomy as a pretext to abruptly extend the scope of their activities in a given sector or business, whether by way of regulation, export bans or even nationalisation. In fact, the closer you get to what a state considers strategic, the higher the level of operational risk associated with arbitrary action by that state. And this perception can, of course, be affected not only by economic shocks but also by pure geopolitical rivalry, the issue of semiconductors being a prime example. The only way to anticipate this type of risk will be to cultivate a keen perception of the long-term strategic priorities of each state.
Beyond the political rhetoric, the truth about minimum wage earners in France
The new prime minister said in his policy speech that he’s keen to “break France out of the minimum wage trap”. But what’s the true picture? Does France have a high proportion of minimum wage earners? What’s the reality behind the message? First and foremost, there’s no denying that the proportion of minimum wage earners in France has risen in recent years, for a variety of reasons. The minimum wage in France is relatively high as a proportion of the median wage. Furthermore, inflation has been high over the recent period, and perceived inflation probably higher still. This means that, despite nominal wages having risen since 2022, the average purchasing power of wages has fallen relative to the pre-pandemic period, and has no doubt fallen further still in perceived terms.
According to French statistics service DARES, the proportion of employees benefiting from an increase in the minimum wage as of 1 January climbed to 17% in 2023 (3.1 million people), up from 12% in 2021 and less than 10% in 2010. However, there have been times in the past when this proportion was just as high (it was over 16% in 2005). It also comes out lower when only full-time employees are considered (around 12% at 1 January 2023).
There are various reasons for the recent rise in the proportion of minimum wage earners. Chief among them are the mechanism by which the national minimum wage is automatically pegged to inflation and France’s wage negotiation process. Wages are no longer pegged to inflation, the one exception being the national minimum wage, which is automatically adjusted each year based on a formula that takes into account consumer price inflation excluding tobacco for the lowest equivalized disposable income quintile, with further interim increases if that inflation measure increases by 2% or more relative to the last adjustment. After an adjustment (of which, thanks to high inflation, there have been many over the recent period), the official national minimum wage catches up with or even overtakes agreed minimum wages in some industry sectors. This process thereby results in an immediate increase in the total number of employees at minimum wage level. Over the medium term, however, any increase in the official national minimum wage is likely to lead to an increase in wages at the bottom end of the distribution more generally as negotiations between management and labour culminate in increases in agreed minimum pay levels in specific industry sectors1. However, this outcome is not always guaranteed, since management and labour are under no obligation to set new minimum pay levels significantly above the official national minimum wage. Nor are there any guarantees as to the timing of such increases: while minimum pay levels must be increased to bring them at least into line with the official national minimum wage, the wage negotiation process can take some time to conclude. The upshot of all this is that recent adjustments to the national minimum wage have, in the short term, tended to push down the overall wage distribution.
Other factors have also contributed to this decline in the overall wage distribution towards the national minimum wage. As we had already highlighted in a previous article, job creation over the recent period has driven a sharp increase in the employment rate in France, reflecting the fact that people who previously were or would have been out of work (due to inactivity or unemployment) are now in work. Since these people tend, because of their skills or the sectors to which they belong, to be in jobs that are less productive than the average, one of the direct consequences is a decline in not only average productivity but also average wages. However, the fact that they have gone from being out of work to “in employment” hurts neither them individually nor the country as a whole. Moreover, social security exemptions for low wage earners may also have contributed to wages in some sectors stagnating at minimum wage level. While the form of such exemptions – in place in France since the 1990s – has evolved over time, they generally offer the maximum reduction in employer’s social security contributions for employees at minimum wage level, with the amount of the reduction decreasing as wages rise before eventually falling to zero. Such a system ought to favour employment for unskilled labour, and this is borne out both in theory and empirically. However, this positive effect on employment comes with a flip side: these measures disincentivise employers from increasing the pay of employees earning close to the national minimum wage, since that would lead to an even bigger increase in the cost of labour as the benefit of the reduction in social security contributions is lost. There is empirical evidence for this effect but it appears to be weak. It is generally recommended that such exemptions should not be available beyond 1.6 times the national minimum wage (French Council of Economic Analysis) – clearly not the case for the current arrangement, with some reductions available up to 2.5 or even 3.5 times the national minimum wage; this does have the advantage, though, of limiting the deleterious effects of setting the threshold very close to the national minimum wage.
While the increase in the number of employees earning the minimum wage is not, on the face of it, good news, it may, as we have seen, reflect more inclusive jobs. Furthermore, when compared with similar comparable countries, France’s official national minimum wage is relatively high as a proportion of its median wage. According to Fipeco, the minimum wage equated to 61% of the median wage in France in 2022, compared with 53% in Germany, 50% in Spain and 41% in Belgium (Italy has no national minimum wage). This means minimum wage earners earn a decent income in France, relatively speaking.
Over the four-year period from January 2020 to January 20242, cumulative inflation in France as defined by the Insee consumer price index totalled nearly 15%. Although inflation has been higher in some other European countries3, that level of cumulative inflation is still very high, particularly compared with inflation in the 2010s (around 12% over a ten-year period). Perceived inflation, which can differ from inflation as measured by Insee, has undoubtedly been higher still. Indeed, price increases have more impact on households, and when frequently purchased day-to-day products see the biggest price increases, perceived inflation tends to be higher4. Over the recent period, food inflation (25.3% between January 2020 and January 2024) has exceeded average inflation; the same goes for fuel inflation, albeit to a lesser extent (the price of diesel rose 18% between January 2020 and December 2023, according to the latest available data).
Meanwhile, although nominal wages have risen significantly since 2022, they have lagged behind rising prices. The basic monthly wage, which corresponds to gross wages excluding bonuses and overtime pay, rose by more than 11% between the fourth quarter of 2019 and the third quarter of 2023 (according to DARES based on the latest available data). Despite this substantial increase, the purchasing power of wages was eroded by high inflation, with the basic monthly wage falling around 1.5% over the period. But this real-terms fall was not uniform across the wage distribution: purchasing power increased slightly over the period (up 2%) for minimum wage earners, while the highest earners on average saw a decline in their purchasing power5. It should be noted, however, that the basic monthly wage does not include other components of pay that may have supported the purchasing power of employees’ income, such as overtime pay and bonuses. In particular, the “purchasing power bonus” up to 2022 and the “value-sharing bonus” thereafter likely contributed over the period.
Our opinion – Over and above the human and social dimension of protecting the most vulnerable, efforts to maintain the purchasing power of minimum wage earners over the recent period have been beneficial. Indeed, low-income households, for whom energy and food account for a bigger share of expenditure, have borne the brunt of inflation. These households also spend the most as a proportion of their income.
Since nominal wage growth remains significant, the purchasing power of average wages should pick up over the next few quarters now that inflation is on the way down. According to provisional Insee estimates, CPI inflation fell to 3.1% year on year in January 2024 – sharply down from the 3.7% seen in December.
The idea behind the political messaging is not just about restoring purchasing power to the people of France – it’s also about restoring the value of work by recognising merit and effort in the workforce. It’s true that intergenerational income mobility is relatively low in France, at least according to recent work published by the Institut des politiques publiques. According to the authors, this is down to inequalities in access to higher education – perhaps something the government could work on.