The French Infection?

17/01/2014 at 4:15 pm

To be clear from the outset, this post has nothing to do with Hollandaise sauce. Its focus is the possible extent of the economic setback in France which saw GDP for the third quarter contract by 0.1% in real terms: a worse outcome than that of any other major European economy, of the recently crisis-hit countries of Italy, Spain and Portugal, and of the eurozone as a whole.

It is France’s importance to the last which is of most interest. France is the second-largest economy in the bloc, accounting for more than one fifth of euro-area output. Fears of damage to the eurozone’s prospects from extreme events at its fringes have abated – rightly so, perhaps. But even a relatively mild bout of weakness at its heart could still be damaging, and this risk has only recently begun to attract attention.

Business-focused London freesheet City A.M. ran a piece on the subject last week which provoked an extraordinary rebuttal from the French Embassy, of all places. Referring to “France’s failed socialist experiment” in its headline the piece was crowing, polemical and clearly provocative – well worth reading, in fact – but it is the claims made in the official French defence which need examining.

On growth in particular, Embassy staff refuted the assertion that France’s economy “is shrinking at an accelerating rate” by noting that “the European Commission’s growth forecast for France stands at 0.2% for 2013 and 0.9% for 2014. Real GDP growth is expected to reach 1.7% in 2015.” This is true. Unfortunately, however, the Commission’s European Economic Forecast Autumn 2013, which is where those figures come from, was published on 5 November – 9 days before the actual GDP data for Q3 was released. At the time their quarterly forecast for French growth in the quarter was +0.1% as against +0.2% for the eurozone as a whole. Given the size of its economy the actual outturn of +0.1% for the bloc could be explained by even such a small disappointment from France alone.

Looking forward, even the forecast 0.7% increase in the pace of yearly growth for 2014 was disappointing. True, eurozone members Latvia, Luxembourg and Malta were expected to show lower increases; but then they were expected to have grown at rather higher rates of about 2-4% last year to start with. All of the other eighteen euro countries were forecast to improve more rapidly, as was the UK (+0.9%) and the eurozone itself (+1.5%).

The British article focused in particular on recent downturns in PMI output indicators, which have fallen from a Q3 average of 49.7 for manufacturing and 49.5 for services to Q4 averages of 48.2 and 48.9 respectively (a level below 50 indicates a contraction in activity). In reply, the Embassy noted that “PMI surveys have been very unreliable in predicting France’s GDP growth over the last few quarters. Business surveys conducted by Insee … have had a better track record and … point to an economic rebound in the last quarter of 2013 [of] +0.4%.”

The point about INSEE vs. PMI statistics is arguable. Take the  +0.4% growth estimate for Q4 at face value, however, and the original Commission forecast for calendar 2013 would be achieved. After all, it is not unusual for economic data to show unexpected but ultimately immaterial fluctuations from one release to the next, nor indeed for GDP statistics to be revised up a quarter or several after their initial publication. And market reaction to the disappointing Q3 data was indetectable at the time.

Perhaps the truth lies somewhere between the City’s disdain and the pride of La Défense. (The most recent Bloomberg survey of economists settled the professional consensus for Q4 GDP growth at +0.1%.) A continued period of economic stagnation in France, whatever the cause, would be a matter of regret. Another recession – however shallow or short-lived – would be a setback. Anything more serious would come as a shock.

This blog observed recently that there were no “black swans” last year, making for a welcome change. Let us hope that we will not find one in the shape of another meaningful downturn in France – and therefore, possibly, the eurozone, again. Inauspicious festival as it may be for that country’s President just now, we shall find out when Q4 data is published – on Valentine’s Day.

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