France has sunk into an economic malaise and could take years to climb back out
Markit’s PMI services gauge for France fell for the third month to 48.2 in June, pointing to an outright fall in GDP following zero growth in the first quarter Photo: Xeridat / Barcroft Media
03 Jul 2014
France is on the cusp of a fresh recession as services contract sharply and the country braces for yet another round of austerity cuts, with record jobless levels likely to bedevil Francois Hollande’s presidency for years to come.
Markit’s PMI services gauge for France fell for the third month to 48.2 in June, pointing to an outright fall in GDP following zero growth in the first quarter.
The International Monetary Fund cut its growth forecast this year from 1pc to 0.7pc, warning that there would be no “appreciable decline” in French unemployment until 2016. “Volatile and uneven leading indicators point to the risk of a stalled recovery,” it said.
The IMF said public debt should peak at 95pc of GDP next year but a “growth shock” would push it to 103pc by 2016. The Fund warned of a “negative spiral of low growth and falling inflation” that is pushing up real borrowing costs and further choking investment, already dismally weak. Core inflation was 0.3pc in May.
The economic relapse is a political disaster for Mr Hollande, already the least popular leader in modern times with a poll rating of 23pc, and reeling from a crushing defeat by the far-Right Front National in European elections.
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The country is being left behind by Spain and others as they reap the first rewards from supply-side reforms, although the France’s Socialists grumble that they are merely under-cutting France with deflationary wage cuts in a 1930s-style race to the bottom that ultimately benefits nobody.
Mr Hollande is paying the price for a failed strategy in his first two years in office when he clung to the old model and relied on tax rises rather than spending cuts to cover austerity packages. The state sector has risen to 57pc of GDP, suffocating the private economy.
Yet the country is also caught in a vicious circle as it tries to meet EMU deficit rules, forced to push through successive austerity packages without offsetting monetary stimulus or a weaker currency. The IMF said France’s exchange rate is over-valued by 5-10pc.
The effect of austerity has been to erode the tax base, leaving the budget deficit stuck at over 4pc of GDP. France has gained remarkably little from fiscal tightening equal to 5pc of GDP over the last three years. Undeterred, it is now pushing through extra cuts of €50bn by 2017 under the new premier Manuel Valls, dubbed the “economic Clemenceau” for his willingness to endure casualties stoically. The biggest hit will come next year, raising the risk that economy will once again to fail to achieve escape velocity.
There is unlikely to be a quick rescue from the European Central Bank. Mario Draghi, the ECB’s president, offered no further clues yesterday on whether the bank would launch quantitative easing to revive credit and to build a safety buffer against deflation.
Mr Draghi said the ECB’s next rounds of cheap loans for banks (TLTROs) could inject €1 trillion into the system, and signalled that borrowers would not be treated too harshly if they used the money to play the “carry trade” by investing in government bonds rather lending to the real economy.
However, it is unclear what the ECB policy is. Bundesbank chief Jens Weidmann said the rush into peripheral bonds was “not without danger”, and may reverse abruptly. He warned that loose money is once again encouraging bad practices.
The bar for QE clearly remains extremely high. The ECB is likely to wait until later this year to see whether the measures agreed last month start to unlock credit for small business in Southern Europe. For now private sector loans are contracting at a 2pc rate.
President Hollande has made his peace with the employers’ federation Medef this year, launching a burst of Gallic Thatcherism. He is pushing through tax relief for business and a shake-up of labour markets along with wage freezes, despite ever-louder protests from his Socialist Party base.
The IMF praised the package of measures but said dismissal rules are still among the most restrictive in the OECD club of rich states, and there has been “no progress” on product market reform for five years. At best it will take years to pull France out of its deep malaise.
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