France's zombie economy is missing out on Europe's recovery

Europe's economy is enjoying a rare bright spot - growth figures have been surprising analysts in a positive way for once.

One big thing is standing out like a sore thumb - France's performance.

While other countries, particularly Spain and Germany, have been powering ahead (from very different levels), Europe's second-biggest economy doesn't seem to have much going for it.

But what's going on?

1.) French corporates don't look too healthy

French company debt as a multiple of the amount those firms produce is at an all-time high. Here's Gilles Moec at Bank of America (who also happens to be the former head of international macroeconomics at France's central bank):

Even if with QE, ECB has become very credible on the "low for long" interest rate policy stance, interest rates cannot remain below equilibrium in France forever. In addition, companies cannot maintain a decent level of capex if their expected profitability does not recover at some point. And, cheap credit can trigger a process of "zombification" of the corporate sector by keeping fundamentally unsound businesses alive, which, down the road, would damage growth potential by keeping resources skewed toward the least productive sectors.

This is how French corporate debt as a multiple of corporate output looks. To simplify, French corporate debt was quite stable at about 200% of output in the years running up to the crisis, but it's been climbing steadily since:

Moec stresses that France's corporate debt is easier to service than Spain's - Paris didn't face the sort of considerable climb in lending rates that Spain did during the euro crisis. But all the same, with debt rising and profits margins still looking thin, corporate France won't be rushing to hire and cut the country's record unemployment rate (10.4% in the Q4).

2.) Economic reforms are an uphill struggle and the deficit is still sizable

Either the country is just lagging behind, or its structural problems are really severe.

And what's more, though reform efforts have been made, Credit Suisse's analysts are pretty pessimistic about the potential for further big shake-ups:

There is strong opposition within the Socialist Party to a moderate reform agenda (extending Sunday trading from 5 to 12 days, de-regulating some intercity bus routes and de-regulating parts of the legal profession), that after 200 hours of debate, M. Valls, the prime minister, had to resort to rarely used constitutional measures to force the bill through by decree (Financial Times, 18 February). This does not bode well for the more urgent labour market reform pencilled in for this summer (where by rules on worker representation in companies employing more than 49 people were due to be relaxed, making it easier to have flexible pay).

France's debt situation in general is not looking so hot, and the country would need a much sharper fiscal tightening (government budget cuts or tax hikes) than Italy if inflation and growth both stay extremely low:

3.) And there's no real sign of growth

France's business surveys have been pretty dismal, even after very slow growth in 2014. In the final quarter of the year, the French economy grew by 0.1% from Q3, an increase of just 0.2% over the whole year.

France's purchasing managers index (PMI) scores have repeatedly been worse than the rest of the bloc. The measure is now signally growth at 51.7 (anything above 50 signals growth), but that's below the 54.1 for the eurozone in general. France's manufacturing sector is still signalling recession, too.

For new orders to businesses, France's PMI scores are the worst in Europe - that in itself is quite an achievement:

The situation isn't dismal - France doesn't look likely to fall into recession again and will see some modest growth in the year. But the country still has a lot of structural issues, and seems least likely to benefit from the current positive conditions, compared to the other major economies.