France slides towards recession

Nov 09 2012, 21:46 IST
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SummaryFrance's central bank said it expected the euro zone's second-largest economy to slip into recession as 2012 ends.

France's central bank said it expected the euro zone's second-largest economy to slip into recession as 2012 ends - a scenario that could make it harder for the government to hit next year's debt-reduction targets.

The Bank of France, which had already predicted gross domestic product would shrink 0.1 percent in the third quarter, said on Friday it was now expecting a similar 0.1 percent decline in the last three months of 2012 as well.

Economists said the news showed the Socialist government was being optimistic in forecasting growth of 0.8 percent next year, especially when it also hopes that the biggest post-war budget cutbacks will slash the public deficit to 3.0 percent of GDP, from an estimated 4.5 percent this year.

It's not looking good, said Nicolas Bouzou at economics consultancy Asteres. There's a real inconsistency in the government's policies. They're creating a recession, and the growth-boosting policies will only come in afterwards.

Michel Martinez, an economist at Societe Generale bank, said the government would have to respond to the downturn even if it was likely to be much milder than in spots like Spain or Italy.

It's a political choice, he said. They're going to find themselves with two options. Either they forget about more budget tightening and miss the budget target, which risks damaging France's image with markets, or they correct the budget, he said.

President Francois Hollande's Socialist government forecasts 0.8 percent growth in 2013 after 0.3 percent in 2012, and hopes that 30 billion euros of budget savings - comprising spending cuts of 10 billion and tax rises of 20 billion - will allow it to meet its European commitments on deficit reduction.

The risk, economists say, is that it cannot do both.

GDP stopped growing in the last quarter of 2011 and stayed at zero in the first and second quarters, according to the most recent official estimates available.

Economists polled by Reuters are on average predicting zero growth again in the third quarter when official estimates for that period are published on November 15.

The statistics office reported a poor finish to that quarter on Friday, with overall industrial output dropping a hefty 2.7 percent in September after a 1.9 percent rise in August.

In the manufacturing sector alone, output fell 3.2 percent in September, after August's 2.1 percent rise, the statistics office, INSEE, said.

That may suggest the Bank of France's gloomy forecasts for the end of the year are closer to reality than

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