23rd April 2012
Today I wish to return to a subject I discussed back on November 11th where I reviewed whether France could still be the "crowing cockerel" of Europe. Back then she was showing signs of an economic slowdown if you cared to look for them and this made me wonder if phrases like this uttered by her President Nicholas Sarkozy might be regretted.
"I want the world to see the victory of the European model, which has nothing to do with the excesses of financial capitalism."
When we see what has been inflicted on Portugal and Ireland and particularly Greece it is difficult to know whether to laugh or cry at the arrogance expressed here. Oh and it was also a misrepresentation as French banks made the mistakes of Anglo-Saxon ones!
The case for the defence
This is represented by France's overall performance over the credit crunch era where she has recovered ground which the UK for example has not. According to INSEE (her statistics office) her economy shrunk by 0.1% in 2008 and 2.7% in 2009 and then grew by 1.4% in 2010 and 1.7% in 2011. Her Gross Domestic Product is now just under 2 trillion Euros (1.9954).
However even here there are signs of worry. For example the growth in 2011 relied on a strong performance in the second quarter of 2011 when it was 0.9%. Since then it has faded to 0.3% in the third quarter and 0.2% in the fourth.
What is the outlook for 2012?
If we look at the forecasts and analysis from INSEE we see one phrase which stands out.
"predicated on a flat economy"
As official forecasts tend to have some rose-tinting this is not inspiring and it is based on two expected developments. If we look at unemployment we see this.
"The unemployment rate stood at 9.4% (9.8% respectively including the French overseas territories) of the active population in Q3 2011. It should increase to 9.7% by mid-2012 (10.1% respectively including the French overseas territories)."
And as unemployment drifts higher INSEE expects France's trade performance to weaken in 2012.
"The rate of growth in exports at the end of 2011 is unlikely to grow maintained in early 2012………. The contribution of foreign trade to growth, which was clearly positive in Q4 2011, should become neutral through to the time horizon of the forecast."
So we have rising unemployment and a worsening trade performance as issues to consider.
A technical issue
Those who follow my updates will be aware that there are many flaws in GDP figures. One of them is that they can be flattered by falling imports which improve net trade. So the GDP numbers improve when the people are poorer and this has affected Greece in particular. Well take a look at this.
"After falling sharply in Q4 (-1.2%) imports should return to a growth rate that is more in line with domestic demand (+0.6% per quarter)."
So in the last quarter of 2011 this was an influence on France.
Industrial and Manufacturing production
Let us examine the latest data.
In February 2012, manufacturing output strongly decreased in volume (-1.2%). It was almost stable in January (-0.1%).
Output increased in total industry (+0.3%) because energy consumption soared in February with the cold spell.
During the last quarter (quarter-on-quarter change), output decreased in the manufacturing sector (-1.1%) as well as in the industry as a whole (-0.5%).
Manufacturing output decreased by 1.6% (y-o-y).
These are becoming familiar trends as we examine different countries. Falling manufacturing output is something of a theme in 2012 and having industrial output boosted by cold weather is a temporary influence.
If we look at the underlying indices we see that where 2005=100 French industrial production is at 92.1 and her manufacturing output is at 90.2. So if we look at western countries in general we are left with the question what has grown since 2005? I will do a full post on this in the days to come but I am left with the thought that western economies hitting a credit crunch with under resourced production sectors now have smaller ones. Ouch!
Manufacturing industry activity
There is a survey for this and whilst the number improved from 93 to 96 in March it remains below the average of 100. And the recordings for recent change in output of -10 and total order levels of -23 are not helping.
If we go back to the heady days of the growth of early 2011 this measure recorded 110.
Today's Purchasing Managers Index
"The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, posted 46.8, down from 48.7 in March. The latest reading was the lowest in six months."
If we remember that 50 is the benchmark for such measures we can see that France's economy weakened further in April. The weakness was most marked in the service sector but as we can see below all areas fell.
"Manufacturers and service providers both reported lower intakes of new work, with the former registering the sharper decline"
And this sentence is concerning.
"The latest drop in outstanding business was the sharpest since August 2009"
If we look at the way that this composite measure does seem to have a good correlation with French economic output there are genuine worries for 2012. Actually the growth at the end of 2011 looks as though it was the outlier and if the measure continues to be reliable we can expect a fairly sharp downwards turn in recorded GDP (Gross Domestic Product) growth.
French austerity will also bite in 2012
One of the problems of having a President who is one of the architects of agreements for a balanced budget and national debt to GDP ratio of 60% is that you are expected to do it yourself! Now admittedly this didn't bother France (or anyone else…..) much in the era of the past Growth and Stability Pact but the new re-born version has had France
trying to achieve it.
The problem is that fiscal deficits to GDP ratios of 7.5%,7.1% and then 5.2% not only leave room to catch-up they have seen France's national debt to GDP ratio rise from 64.2% in 2007 to 85.8% at the end of last year.
So France chose austerity which had this effect in 2011.
"In 2011, the total tax burden on households increased by 4.0%."
But she has found herself have to tighten this noose around her neck in what has become a self-repeating theme. In November France announced a further 7 billion Euros of austerity for 2012 and a further 11.6 billion Euros for 2013 as she attempted to hit her fiscal deficit targets of 4.5% and 3% for these years.
The recent track record of increased austerity is that is drags the economy down with it. This is particularly pronounced in countries where the economy is already shrinking.
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