Rose-tinted return for French government but recovery not assured

Reuters News
Posted: Aug 19, 2013 10:17 AM
Rose-tinted return for French government but recovery not assured

By Catherine Bremer

PARIS (Reuters) - French President Francois Hollande's return from holiday has been eased by a spurt in second-quarter growth. Yet looming tax hikes, raging unemployment and an upcoming pension overhaul will determine whether the rebound can last.

France's exit from recession with growth of 0.5 percent last quarter buoyed a government meeting on Monday where ministers outlined rosy visions they had been asked to draw up during the two-week break of how the country could look in 2025.

A sustained recovery, after two years of stagnation, could vindicate Socialist Hollande's economic policy choices in the face of liberal-minded critics who deride him as too focused on tax hikes and lacking the courage for deep structural reforms.

Economists remain circumspect, however, noting the quarter-on-quarter rebound in output was due less to the government's policies than to a European Commission decision to ease up on austerity demands, which analysts said spurred spending.

None expect to see the second-quarter figure - which could still be revised in September - matched for the rest of the year and note that quarter-on-quarter data is prone to volatility.

Consumer morale, which will be key to turning the fledgling recovery into a sustainable one, may be hurt by plans in the upcoming 2014 budget to wring 6 billion euros more in tax out of the economy. It could also suffer from a September pension reform that could extend the mandatory contribution period.

"Even the government is showing some caution," said Fabrice Montagne at Barclays Capital, which has nudged up its full-year growth outlook to 0.2 percent from 0.1 but has not changed its third and fourth-quarter forecasts of 0.2 and 0.3 percent.

"We are still in a constrained environment where fiscal consolidation and high unemployment are weighing on the economy," he said. "You can't generate much growth when you have a big fiscal adjustment in a climate that is not that bright."

A big part of the second-quarter spurt in consumer spending was due to higher heating bills due to bad weather and a chunk of the overall growth in economic output was due to temporary inventory restocking at manufacturing firms.

Deutsche Bank has left unchanged its third and fourth-quarter growth estimates at 0.1 and 0.2 percent, noting fiscal consolidation is creating a "drag" this year equivalent to 2 percent of GDP and predicting further job cuts.

Societe Generale even sees a chance that economic output may recede in the current quarter compared to the previous one.


Hollande has been battling to guide Europe's second-biggest economy out of its slump while stemming the high public spending and borrowing that fed into the euro zone crisis. A lag in competitiveness in French industry makes his quest harder.

Voters will only reverse their negative view of Hollande if and when he fulfills a promise to reverse the long rise in unemployment by year-end, something he hopes to achieve in part via state-subsidized temporary jobs and training places.

While the surge in Q2 growth - the strongest since Hollande took power in May 2012 - should stoke some hiring in the second half, growth is generally believed to need to reach 1 percent before firms stop trimming staff and 1.5 percent for net overall job creation.

Forecasts for full-year GDP are broadly flat, with the government eyeing between -0.1 percent and +0.1 percent.

"There are encouraging signals but we need to consolidate this recovery," Digital Economy Minister Fleur Pellerin told BFM television as ministers headed into a meeting to share their rose-tinted visions -- quickly scorned by opposition politicians -- of a France restored to economic glory a decade from now.

Finance Minister Pierre Moscovici said full employment was a realistic target for 2025 if France pursues more labor reforms, diversifies its economy and cuts both public spending and taxes.

Industry Minister Arnaud Montebourg foresaw France returning to dominance in sectors like transport and aeronautics and leap ahead in new areas like renewable energy and smart power grids, but did not explain how this would happen.

Hollande's critics - including his conservative predecessor Nicolas Sarkozy who is reportedly planning a comeback campaign for 2017 that will asks why France is the only country lacking the courage to reform - say big structural changes are needed to revive waning entrepreneurship as many flee the country.

"The stirring of some economic indicators in mid-August should not reassure us, or, even worse, put us to sleep," Pierre Gattaz, head of the national employers group Medef, wrote in an editorial in the daily Les Echos.

(Reporting by Catherine Bremer; editing by Philippa Fletcher)