Posts tagged ‘France’
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.
It may be a quiet summer – for the moment – but what a difference a few days makes. Last week it seemed that (developed) world growth had flattened; this week it was confirmed. Only yesterday the Bank of England Inflation Report forecast 2012 GDP growth of around zero. This morning, French industrial production for June came in at exactly 0.0%, bringing the year-over-year number down to -2.3%. And China reported export growth over the year of only 1%, down from 11% the previous month.
At the same time, reported Q2 earnings for the S&P 500 index – which had been growing at a reasonable rate in prior quarters – are almost exactly unchanged on a year ago. Flat economy, flat earnings: not much to be positive about there.
Still, some perspective is needed before we get too bearish about these recent numbers. In the UK for instance, where year on year GDP growth fell to -6.1% in real terms at the nadir of the recession in 2009, flat growth this year doesn’t look too bad by comparison. In France too, industrial production was falling by over 19% at the worst point in ’09, and China lost 26% of her exports at the same time.
In other words, the disappointment and stagnation we’re seeing today is an order of magnitude less concerning than the painful contraction witnessed in the aftermath of the credit crunch.
That’s not to dismiss it entirely of course. A growth hiatus is a bleak substitute for growth. But it’s better than collapse.
This coming Sunday sees a presidential election in France and parliamentary elections in Greece. In the case of France it looks probable that we are to lose one half of the “Merkozy” double act that has presided over the eurozone crisis so far. When it comes to Greece the only certainty is that caretaker prime minister Lucas Papademos will no longer be in charge. Would a left wing President of France mean the abandonment of fiscal consolidation? And could popular discontent in Greece bring about demands for a renegotiation of the country’s bailout agreement, with all the chaos that could entail?
The risk from France would seem to be the lesser of the two. M Hollande, the socialist frontrunner, has certainly used the austerity issue as a stick for beating his rival. He has also threatened to refuse to ratify the European “fiscal compact” agreed at one of last year’s many emergency summits unless various measures are taken to boost growth. Crucially, however, he is committed to a remarkably similar domestic fiscal path to that envisaged by M Sarkozy. Both men would see France’s budget deficit reduce to 3% of GDP by 2013 (from an expected 4.4% this year), and both want to balance the budget thereafter – though M Hollande would see this goal reached only in 2017, a whole year later than his opponent, and favours a 50:50 split between tax increases and spending cuts, as distinct from the radically different 35:65 split on the table at present.
At the European level, even the threat to scupper the fiscal compact would depend on failure to agree measures such as those in M Hollande’s four point plan for growth: eurozone-wide bonds for infrastructure projects, more lending by the European Investment Bank, a financial transactions tax and more efficient use of EU structural funds.
Now the idea of using EIB lending to stimulate growth appeared as far back as last July’s EU agreement over Greece, so this could be a serious runner. Chancellor Merkel has already indicated that the next EU summit, in June, will have a growth agenda. If M Hollande manages to secure backing for even one or two of his proposed ideas he would be able to present this as a transformative victory for a more pro-growth politics across the Continent – especially if more EU money for France should happen to be an incidental consequence of the plan. Having already accomplished his most important task – getting elected – his need to tear up the fiscal agreement would be greatly lessened. (This is certainly the way markets are betting, with French bond yields showing no signs of panic.)
The Greek situation is altogether more unpredictable. The electoral system is a model of proportional representation in action. Like the Spartan force at Thermopylae, the legislature has 300 members. 250 of these are allocated proportionately, with a threshold of 3% necessary to win the minimum 8 seats in parliament. The remaining 50 are awarded to the party with the most votes. That will almost certainly mean the centre-right New Democracy party of Antonis Samaras; with poll numbers in the low 20s, ND is several points clear of its nearest rival, the centre-left PASOK, at the head of a very divided field.
Now Mr Samaras has already committed himself, in writing, to Greece’s bailout terms, on the insistence of his country’s creditors. He intends to govern with the aid of PASOK in a continuation of the coalition which has been in place since the fall of George Papandreou last November. But the problem is that the main parties are so unpopular that even with that 50 seat bonus they might still struggle to achieve a majority. The communists, the other leftist parties and most of the nationalist right is against the austerity programme.
In other words, there is a more obvious worst case outcome for Greece. While the communists, nationalists etc. are highly unlikely to join a formal coalition against the political mainstream, they could easily unite to oppose specific votes / budgetary measures, holding out the prospect of fresh elections and constant political uncertainty into the bargain. Anything short of a clear majority for the main parties, therefore, could spell more market drama.
There are of course many observers who would like to see the country’s present rulers out of office, democracy restored, Greece out of the euro, austerity ended and the EU itself given an enormous bloody nose. Despite everything, however, while the most recent polls show that 60% of the electorate oppose an ND / PASOK coalition, 77% “would like the next government to do everything possible for Greece to remain in the euro area”. Whatever else it might be, the political situation in Greece is not that straightforward.
In conclusion, then, the French election over the weekend will be interesting. But the Greek elections could be important.
This week the Bank of England published its quarterly Inflation Report, and its Governor highlighted the fact that misery in Europe will hit growth in Britain too. From the document itself it looks as though the Bank’s forecast for growth this year and next is a sluggish 1% (it is difficult to be precise as the numbers are published only in the form of a small green chart). The autumn economic forecast of the EU Commission from the week before was even gloomier: Brussels sees UK growth next year at a meagre 0.6%.
One of the key repercussions of slower than anticipated growth in this country will be the impact on our debt arithmetic. This was already looking rocky over the summer. Although the numbers have improved since and we are currently in line with this year’s fiscal targets, the Office for Budget Responsibility is carrying this warning on its website at the time of writing:
Public sector net borrowing was £7.5 billion lower in the first six months of the fiscal year than in the same period of 2010-11. We would need a slightly bigger fall in the second half to match our March forecast of a £122 billion deficit for the year as a whole. In March we forecast that there would be a bigger fall in the second half, but prospects clearly depend in part on wider developments in the economy.
This is not surprising when we consider that their March forecasts were based on assumed GDP growth of 1.7% for this year and 2.5% next. Tax receipts of £588.6bn this fiscal year were projected to rise in line with nominal GDP; losing growth of 1.5% therefore equates to revenue loss of £8.8bn. At the same time, there could be slippage on the expenditure side too. (March’s numbers were based on claimant count unemployment of 1.55m this fiscal year, for example; the current level is 1.6m. And let’s not even think how much extra cash might have to be raised to support our banks in the event of an Italian or Spanish default.)
It is also the sad fact that Britain is not facing these challenges from a position of strength. The budget deficit for this year was forecast to be 7.9% of GDP, and 6.2% for 2012-13. In reality these numbers could look more like 8%+ and 7%, pushing our debt to GDP ratio (on a Maastricht basis) close to 90%. And the March budget envisioned balancing the books no earlier than 2016-17; revised borrowing numbers could push that estimate even further into the future.
There is something of a silver lining in that growth fears are keeping commodity prices contained, and this, coupled with continued weak demand, should see less erosion of wealth and income by inflation. Nonetheless, should the bond market lose confidence in us this would be cold comfort.
Most worrying on this front has been the treatment meted out to France in recent days. Speculation has been mounting that her AAA rating is threatened by – in Reuters’ colourful phrase – “being sucked into a debt spiral” as the economy slows. Ten year French bond yields have risen from 3.1% to 3.6% this month, as compared to 2% in Germany and 2.3% here. And yet compare France’s debt arithmetic to Britain’s: new austerity measures announced only a few days ago are forecast to see a budget deficit of 5.7% of GDP this year fall to 4.5% in 2012. French debt to GDP was 82% last year, in line with ours (80%). French growth is also forecast to be 0.5%-1% next year. In other words, France has stronger debt fundamentals than the UK. But it is France that has been singled out by markets for a beating.
It would appear that Britain’s non-membership of the eurozone is getting us a lot of credit. And given the state of our national finances, we need as much of that as we can get.
As equity markets consolidate their summer gains and the economic recovery continues to hold, now is a good time to remind ourselves of the serious problems still faced by many countries in the wake of the financial crisis.
Last week, Anglo Irish, the broken and soon to be broken up bank, announced that it needed a little more help from the Irish taxpayer to stay solvent:
Anglo Irish Bank Corp. said Aug. 31 it needs about 25 billion euros ($32.1 billion) in state funding, equivalent to about two-thirds of this year’s tax revenue. Standard & Poor’s, which last week cut the country’s credit rating to AA‑, said the state may have to inject as much as 35 billion euros.
The Irish finance minister has even gone on the record to say that the latest bailout bill won’t bankrupt the country. Of course, the very fact that such an assurance is necessary makes it less than entirely reassuring.
Meanwhile, over in Spain, where unemployment of 20% is even higher than it is in Ireland (14%), trade unions are planning a general strike for the end of this month to protest the enactment of labour market reforms. Said one union leader, the appropriately surnamed Ignacio Fernandez Toxo, at a rally in Madrid yesterday: “Now more than ever, a general strike makes sense.”
It would be too glib to dismiss this as isolated squealing from the PIGS. This week’s transport strikes here and in France could well foreshadow worse to come. After all, it is not just the Irish who face the prospect of having to inject more taxpayer funds into a banking system that had outgrown the national balance sheet; nor is it just the Greeks who are having to confront the problem of rising debt to avoid the nightmare of a full blown sovereign crisis.
We remain sceptical of a double dip and constructive on the economic outlook, therefore, but cautiously so. Events over the last couple of weeks should serve to remind us that along the road to recovery the world will encounter a few speed bumps – and the occasional land mine.