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Rise of the ‘yellow vests’

While the social and political crises in France should not be underestimated, their impact on the country’s economy may not be as dramatic as they may appear at first glance. Television images of burning cars and strikers destroying stores are powerful, but most of this is contained in a small area of Paris, namely the 8th arrondissement, where President Macron’s residence is located. The protests were initially against fuel tax rises, but most of the yellow-vest demonstrators are from sectors of the population that have long felt neglected by successive governments.

To quell the protests, Macron has announced a new package of measures that will see a rise in minimum wage and tax concessions, expected to cost around 10 billion euros or around 0.5 per cent of GDP. At the same time, the President has said that he will accelerate the reform process - this is good news.

Impact on the economy

Given lower tax receipts due to lower growth, the deficit could be closer to 3.5 per cent of GDP in 2019, rather than the planned 2.8 per cent of GDP if nothing is done. However, Macron has said that large corporates, and maybe the wealthy, could be asked to contribute. An acceleration of some spending cuts is also highly probable. The Prime Minister will go into more details in the coming days.

For the economy, these measures will boost purchasing power by around 0.7 per cent in 2019, reinforcing our positive outlook for the French consumer. It is now clear that purchasing power will record the strongest growth in 2019 since the financial crisis, probably at levels above 2 per cent year on year.

Investment opportunities

Brick and mortar retail names like Carrefour or Fnac Darty, which have fallen by nearly 17 and 18 per cent respectively since the demonstrations, could benefit from this boost in purchasing power. There may be isolated cases of companies that miss fourth-quarter targets because of the impact on production of some roads being blocked by the yellow vests, but these effects will be one-offs and could create investment opportunities.

Source: Refinitiv, Fidelity International, December 2018

Past performance is not a reliable indicator of future returns

Bertrand Puiffe

Bertrand Puiffe