France Infrastructure Report Q4 2009

We have revised our forecasts to a more bearish scenario this quarter. We now predict that France's construction sector will contract in real terms by 8.5% in 2009, compared with our earlier expectation that it would contract by 5.5% in real terms. This revision is on the back of a downward revision to growth forecasts for the wider economy by our macroeconomic team. We now expect fixed investment across the French economy as a whole to contract by 7.7% this year, with a further 1.6% contraction in store for 2010. As such, although the French government is 'priming the fiscal pump' by carrying out significant spending, anaemic private sector investment is more than offsetting this positive state stimulus. We anticipate that the construction sector will contract again in 2010, by 0.8% in real terms. It will therefore be 2011 before the sector resumes a positive growth trajectory, at a rate of 4.6% in real terms, before seeing real growth of 4.8% in 2012.

The primary risk to a recovery beyond 2010 is a 'double-dip' recession in which an economic bounce is negated by tighter monetary and fiscal policy and/or higher commodity prices, which in turn triggers a second down leg. This may be playing out, given the recovery in asset prices since March, and the potential for interest rates being raised by the European Central Bank next year.

However, there are also upside risks to our forecasts, particularly for 2010. If the French economy strengthens at a more rapid rate than is currently anticipated by our macroeconomic team then privatesector led construction activity should help to ensure positive sector growth next year, in real terms.

French infrastructure companies have, on the whole, performed reasonably well in the first months of 2009. The Bouygues Group generated a net profit of EUR159mn in Q109. Bouygues Construction generated a net profit of EUR48mn in Q109. Lafarge's Q209 net profit registered EUR387mn. And EDF Group generated a net profit of EUR3.117bn in H109, up from EUR3.116bn in H108.