Global Insight
April 9, 2013 4:48 pm
Global Insight: Weak economy adds to Hollande’s headache
As the president grapples with fallout from a scandal, France eked out 0.1% growth in the first quarter
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Jérôme Cahuzac’s fall from grace will undermine the socialist government's attempts to paint itself in different colours from the former centre-right administration of Nicolas Sarkozy
There is no such thing as good timing for a government when political scandal erupts, but the tax fraud affair that has brought low François Hollande has hit the French president at a moment of severe economic difficulty.
“Unfortunately it is a distraction from the real problems,” remarked the head of one of France’s top companies, as he contemplated the precarious outlook for the economy.
“It is not a disaster but it’s not good. It is gloomy. There is a lack of confidence in the decision makers,” he said.
As Mr Hollande and his socialist government continued to grapple with the fallout from the revelation that Jérôme Cahuzac, budget minister until last month, had lied about holding a secret Swiss bank account, the Bank of France announced on Tuesday that the economy had eked out growth of 0.1 per cent in the first quarter.
In the circumstances, that was relatively good news: recent indicators have been a good deal more negative.
Household consumption, traditionally a mainstay of the economy, fell in February and January. New car sales have plunged. This trend was signalled by a fall in household purchasing power last year – the first such fall for 30 years.
Recent business indicators have been equally bad. “France is the European country which has recorded the sharpest fall in business confidence over the past six months,” said Oddo Securities, the Paris broker.
In political terms, the most worrying trend is the rise in unemployment. The number of job-seekers hit a 16-year high in February at 3.18m. Five years ago the figure stood at under 2m.
There is concern that the economy could go back into reverse, after the recession of 2009 and negative growth in the last quarter of 2012. “We argue that the French economy is on the cusp of a triple-dip recession,” wrote Citi Research in a note last week.
It is not all bad news. With its reliance on the “automatic stabilisers” of big welfare programmes, the French economy tends to resist recession more robustly than other economies.
France has, to date at least, also benefited from continued support in sovereign debt markets. This week, yields on 10-year French bonds hit record lows below 2 per cent, holding down the cost of financing the country’s high public debt.
But economists, anxious to see much bolder action to reduce public spending and other structural reforms, are worried that even the government’s revised targets of 0.1 per cent growth this year and 1.2 per cent in 2014 are in jeopardy.
With domestic consumption suppressed by the government’s tax increases, hopes that exports would lift growth have so far been disappointed.
Jean-Michel Six, chief European economist at Standard & Poor’s, the US rating agency, points out that French exports rose just 2.6 per cent between 2007 and the end of last year – compared with 14 per cent for Germany and 17.5 per cent for Spain.
“Unless French export product growth picks up significantly, the French economy is likely to remain in no-growth mode in 2013 and for the best part of 2014. In view of recent trends, such an increase in exports seems unlikely, in our opinion,” wrote Mr Six.
The outlook had unsettled the government before the Cahuzac affair blew up. With weak growth blowing its public finances off course, Paris was already insisting that its European partners must allow it more time to hit this year’s budget deficit target of 3 per cent of gross domestic product.
Under fire from both the right and far left over the scandal, Mr Hollande may now have to pay more heed to those within socialist party ranks seeking a much clearer deviation from what many regard as wrong-headed, German-inspired austerity policies.
A clear shot on this front was fired on Tuesday by Arnaud Montebourg, the leftist industry minister.
“If budget responsibility kills growth, it is not responsible any more,” he said in an interview with Le Monde. “It is absurd and dangerous. It is more than time to open the debate on this policy which is leading [the EU] to disaster.”
At least one upshot of the Cahuzac scandal may therefore be more of what Mr Hollande has politely termed “friendly tensions” with Angela Merkel’s government in Berlin.
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Copyright The Financial Times Limited 2013
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