While INSEE had initially forecast growth of 0.3% in Q2 2016, GDP fell (-0.1%) for the first time since 2014, surprising most economic observers. Some claim that the French economy is drawing to a halt, while others see this decline as a simple bad patch following a particularly active start to the year (+0.7% of growth over Q1).
The main driver of growth, household consumption, remained stable over the last three months (0.0%) following a 1.7% upturn over Q1. The same applied to corporate investments which slowed as expected over Q2 following a marked increase at the beginning of the year with the government incentive allowing for additional depreciation initially planned to end on 14 April 2016 before being extended to 14 April 2017. Output, which fell by 0.2%, was also affected by social action against employment laws in May and June.
Another bad surprise was unemployment which, after an encouraging start to the year, posted one of its largest increases of the last 5 years in August (+1.4% in one month) resulting in an additional 50,200 category A job seekers. Even so, the year-on-year unemployment rate still posted a 0.5-point decrease to 9.6% in mainland France in Q2 2016.
Paradoxically, the business climate, which has been above its long-term average for over a year, posted a slight improvement over September reaching 102 points. The retail trade fell by 1 point (from 103 to 102), whereas services and industry gained 1 point and 2 points respectively. The French PMI Market index is also positive and came out at 53.3 for September compared with 51.9 in August. Despite this, INSEE's turning point indicator still shows economic uncertainty.
In spite of this summer dip, the government, based on good figures for the Business Climate and the PMI Markit index as well as an increase in householder confidence, is maintaining its growth forecast for 2016 at 1.5%; this is more optimistic than forecasts from the Banque de France (1.4%) and INSEE, which has recently revised down its forecast to 1.3%. The government's forecast would need growth to be at least 0.5% over Q3 and Q4, a level that will be difficult to achieve according to many market observers.
On a positive note, the decline in the outlook for economic growth has not yet had an impact on corporate stated demand. We are currently seeing active demand across all space segments. Many transactions are currently underway and should be concluded before the end of the year. Given these conditions, we expect the overall volume of take-up for the full year 2016 to stand at between 2.4 and 2.5 million sq m.
In terms of supply, with a low level of completions due in 2016, most of which have been pre-let, there will be a low level of supply renewal. Given the buoyant level of demand, immediate supply should continue to fall over 2016 and into 2017.
Rates for the French OAT fell once again to a new historic low (0.123% at the end of September 2016), thereby maintaining a substantial risk premium for real estate. The Brexit announcement led to downward revisions for growth forecasts for most European countries and, given that the outlook for inflation remains weak, the low-rates policy of the Central European Bank (CEB) should continue over the months ahead and sustain an attractive risk premium for the real estate category.
The investment market, apart from the low-rate climate, will continue to benefit from an abundance of capital over the coming months – as demonstrated in particular by the numerous transactions underway involving Korean investors – but also from the end of the Franco-Luxembourg tax treaty. We therefore expect the investment volume for 2016 as a whole to stand between €18 and €20 billion in the Greater Paris Region.
The JLL potential indicator has now entered into the 'balance zone'; this is due to a slight fall in the ability to create value following further prime yield compression and increases in the prime rent in the Paris CBD.