France’s statistics office said GDP growth was zero in the
April-June period versus first quarter growth that, at 0.9 percent, was
the best in almost five years. The main cause was a drop in
household consumption, which was down 0.7 percent from the first
quarter, a particularly worrying sign for an economy that, unlike
Germany’s, is heavily reliant on domestic demand. Economists polled by Reuters had on average predicted a rise of 0.3 percent. The
French report comes ahead of similar readout for Germany and the euro
zone on Aug. 16. Barclays’ economics department said the French figure
could drag the euro zone result lower than a consensus forecast of 0.3
percent. Philippe Waechter, an economist at Natixis Asset
Management, said France would need to generate growth of 0.5 percent in
both the third and fourth quarters to reach its target of 2.0 percent
growth overall this year, and that may not happen. The Bank of France’s sees third quarter growth of 0.3 percent. Chris
Williamson, economist at British-based consultancy Market, said a
second-quarter GDP drop had always been on the cards after a bumper
first three months. “But it is clear that the recovery has weakened significantly in recent months,” he said. After
the European Central Bank moved this week to defend the bonds of Italy
and Spain, market fire turned on France amid rumor and counter-rumor
about the health of its banks and the solidity of a ‘AAA’ credit rating
that allows it to finance its sovereign debt as cheaply as possible in
markets. A stagnating economy will not help. French Finance
Minister Francois Baroin played down the poor performance, saying it was
no surprise after a strong first quarter. He said the government
would not downgrade its growth forecasts and would meet its targets for
debt reduction after President Nicolas Sarkozy ordered his ministers on
Wednesday to find new ways to prune the public deficit. With
presidential elections less than nine months away, the minister strove
to strike a balance between market demands for convincing
deficit-reduction and voter concern that excessive austerity will hit
household budgets and undermine France’s tradition of generous welfare
provision. “What we have to do despite the budget tensions and the
difficulty of this process is find savings that won’t hurt the most
vulnerable or the economy,” Baroin told RTL radio. Austerity measures have sparked protests in other European countries, above all Greece. The
government’s debt-cutting plan is based on GDP growth of 2.0 percent in
2011, 2.25 percent in 2012 and 2.5 percent on average in each of 2013
and 2014. A recent IMF report gave a somewhat less rosy picture of 2.1
percent for 2011, 1.9 percent in 2012 and 2.0 percent for 2013. Sarkozy
told Baroin and other ministers earlier this week to break off from
summer holiday and prepare whatever additional measures may be needed in
the 2012 budget bill to achieve the country’s deficit-reduction goals.
Those measures should be announced on Aug. 24. France, Italy, Spain
and Belgium imposed a ban on short-selling financial stocks late on
Thursday, in a coordinated attempt to restore confidence in a market hit
by rumors and broader turmoil that has led to surges in borrowing costs
for some countries in Europe, though not core euro zone countries such
as France. French borrowing costs, as reflected by the yield on
10-year benchmark bonds, edged below 3 percent on Friday for the first
time since November 2010 despite the gyrations in banking shares this
week.
