France faces deeper cuts and threat of recession

Thu, Aug 9, 2012, 01:00

FRANÇOIS HOLLANDE’S government may be forced into deeper than expected spending cuts in the autumn after the Bank of France said the economy may be slipping back into recession for the first time in three years.

In a bleak assessment of France’s short-term prospects, the central bank said the economy was likely to fall into a shallow recession in the third quarter. The report cast doubt on the government’s growth forecasts, adding to pressure on the government as it prepares a tough budget for the autumn.

Following worse than expected economic figures from Germany and Italy this week, the bank’s forecast for Europe’s second-biggest economy dampened hopes that the euro zone recovery is around the corner. European stock markets have rallied strongly in recent days amid speculation that governments and the European Central Bank will embark on concerted action in the coming weeks to relieve pressure on the currency area’s weakest economies.

France emerged from its last recession – defined as two consecutive quarters of negative growth – in the spring of 2009, and the economy has since struggled to gain momentum in the face of the euro zone debt crisis.

The Bank of France yesterday predicted a 0.1 per cent contraction in gross domestic product (GDP) for the third quarter of this year, following a similar fall in the previous three months.

Uncertainty over the fate of the euro and uncertainty in credit markets have hit France hard. Exports to troubled Spain and Italy have declined, and with consumers and investors cancelling or putting off spending decisions, the construction and car industries have slowed down sharply. Recent figures put the jobless total at nearly 10 per cent of the workforce.

Faced with these trends, Mr Hollande’s government was last month forced to cut its growth forecast for the full year from 0.4 to 0.3 per cent, and from 1.7 to 1.2 per cent for 2013. Even the revised predictions are considered optimistic by the International Monetary Fund, a view strengthened by the central bank.

The slowdown will raise pressure on the government as it prepares for what was already expected to be a tough budget in the autumn. Mr Hollande has insisted the public deficit will be reduced from 4.5 per cent of GDP this year to the EU limit of 3 per cent by the end of 2013.

Before setting off on their holidays last week, government ministers were issued with spending ceilings for the next 12 months that will require major cuts in all but a handful of departments. The socialist administration plans €7 billion in new taxes for this year on big companies and wealthy households, and has said €33 billion will be needed to meet the 2013 goal.

Mr Hollande, elected in May on a pledge to halt rising unemployment and reverse industrial decline, has been confronted since taking office by a round of industrial layoffs and the need to curb spending to meet deficit targets. Its biggest car maker, Peugeot, announced plans last month to close a plant near Paris and cut 8,000 jobs, prompting industry minister Arnaud Montebourg, an advocate of protectionism, to call on Brussels to monitor rising imports of South Korean-made cars.