French economy stagnates in second quarter

French economic growth ground to a halt as household spending shrank in the second quarter, raising pressure on the government to announce cutbacks to convince turbulent markets it will deliver on debt reduction targets.

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 August 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.

Government Sticks to Targets

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 August 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.

[Source: By Brian Love, Reuters, Paris, 12Aug11]

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