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11/07/2008Shaky French economy sends warning signals

Plunging industrial output, widening trade deficit, sagging consumer confidence and a crippling national debt is worrying analysts.

11 July 2008

PARIS - The shaky French economy is sending storm warnings, with plunging industrial output, a widening trade deficit, sagging consumer confidence and a crippling national debt prompting dismal predictions from worried analysts.

Adding to the gloom is a realisation that there is limited room to manoeuvre for President Nicolas Sarkozy's reform-minded right-wing government.

For France, much to the president's displeasure, there is little succour to be found in Frankfurt, the home of the European Central Bank and where his fellow Frenchman, ECB head Jean-Claude Trichet, insists there is no scope at present for a reduction in eurozone interest rates.

With the eurozone struggling with record high inflation, the bank last week actually raised its benchmark rate a quarter of a point to 4.25 percent.

At home, according analyst Nicholas Bouzou of the research group Asteres, "the unfortunate state of our public finances does not allow the government to lower taxes to stimulate demand."

The French national debt rose 1.4 points to 65.3 percent of output in the first quarter compared with fourth quarter 2007, well above the 60 percent level recommended by the European Union.

The latest alarm bell to be rung was on Thursday, when the national statistics institute INSEE reported that industrial output plunged in May, posting the worst performance for almost three years.

Production fell 2.6 percent in May after a rebound in April, with declines seen in all sectors and in particular in the automobile industry, where output fell 8.0 percent, according to the national statistics body INSEE.

It was the worst overall output reading since a 2.7 percent decline recorded in October 2005.

Global Equities analyst Marc Touati said the May figure flowed naturally from a previously reported sharp decline in consumer confidence and a steadily widening trade deficit.

"France is certainly on the verge of a crisis without precedent since the recession of 1993," he said, adding that his estimates of economic growth limited to 1.6 percent this year and 1.5 percent in 2009 "seem much too optimistic."

The French government is banking on momentum this year of between 1.7 and 2.0 percent.

Added Gilles Moec of the Bank of America: "The abrupt 2.6-percent month-on-month fall in industrial production in May suggests that the economy is already past moderation and wallows, at best, in stagnating territory, while a dip into negative territory can no longer be excluded for GDP (gross domestic product) growth."

INSEE has already warned that growth this year will likely be limited to
1.6 percent in the face of stagnant domestic spending, inflation at levels not seen for 17 years and a weakening property market.

Moec said France was unlikely to be able to offset unfavourable domestic demand with net exports.

Customs authorities said on Wednesday that the trade deficit widened 26.7 percent in May from the April figure, highlighted what analysts describe as chronically weak competitiveness of French companies on overseas markets.

The deficit in the 12 months to May came to EUR 45.603 billion.

"The deterioration in the deficit is general both by sector and region," Touati said.

"Whether it's in capital goods, intermediate goods, automobiles, whether it's sales destined for the European Union, the United States, Africa, the Middle East or east Asia, French exports are declining almost everywhere and in all domains.

"While a world and European slowdown, as well as a strong euro, play a major role in this deterioration, these figures shed harsh light on the weak competitiveness of our exports around the world."

Touati warned that "nothing appeared likely to be able to improve the situation," notably in light of tepid European growth, a strong euro and high oil prices, and said the annual trade shortfall could hit EUR 50 billion.

At research group Xerfi, economist Alexander Law cautioned against blaming the appreciating euro, which makes eurozone exports less competitive abroad, and rising oil prices for the full scope of the deficit.

He pointed as well to France's dependence on exports to the European Union, which accounted for half of May's deficit.

"The sharp decline in the British and Spanish economies has a direct impact on France," he said. "Sales to both countries were down in May."

[AFP / Expatica]


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