Hollande Scores on Economy as Investment Buttresses Recovery

  • GDP to accelerate, fragility of growth to diminish: Barclays
  • Tax incentives may be tempting companies to add projects

Investors may be finally taking note of Francois Hollande.

The French president scored a rare economic win as investment by non-financial corporations posted its biggest gain in two years in the fourth quarter.

The 1.3 percent increase doesn’t just look like a one-off either, unlike the last time investment picked up at the end of 2013. Then, the gain was driven by a regulatory change that forced companies to upgrade heavy trucks, according to national statistics office Insee.

Now it is helped, not only by record-low borrowing costs and a plunge in oil prices, but by Hollande’s decisions to grant companies accelerated amortization -- a tax break on investment -- in 2015 in addition to a 40 billion euros ($44 billion) payroll tax reduction over four years.

“This is a real recovery dynamic,” said Dorian Roucher, an economist at Insee. “The context is favorable with oil prices and credit conditions but it does seem like companies are taking advantage of the government’s offer of accelerated amortization.”

Investment in telecommunications and manufacturing has been increasing over several quarters, according to Roucher. Insee predicts further gains in the first two quarters of 2016.

The increase helped offset a slowdown in the fourth quarter linked to terrorist attacks in Paris and bodes well for the outlook for the rest of the year.

“Adding the investment positive surprise, we think French GDP is poised to accelerate,” said Francois Cabau, an economist at Barclays in London who says he may need to revise up his forecast for the first quarter. “While 2015 was marked by a GDP growth up-shift, mainly supported by private consumption, 2016 may see further support coming from investment, which would thus reduce the fragility of the recovery.”

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