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ECONOMY

‘Broken down’ French economy grinds to a halt

The French government recognised on Thursday that it's economy had "broken down" after new data showed there had been zero growth so far this year. In more bad news for the eurozone new figures also revealed the German economy has contracted.

'Broken down' French economy grinds to a halt
France's economy has "broken down", the finance minister says. Photo: Kenteegardin/Flickr

The French economy ground to a standstill in the second quarter of the year, official figures published on Thursday showed, further fanning fears that France could drag down a stuttering eurozone recovery.

France's gross domestic product was flat in the second three months of the year, according to national statistics office INSEE, following zero growth in the first quarter.

The figures prompted the finance minister to slash the government's forecast for growth in 2014 to "around 0.5 percent" compared with a previous projection of 1.0 percent.

Michel Sapin said that "growth has broken down, in Europe and in France."

"With zero growth in the second quarter, thereby extending the stagnation we saw in the first, our country is slowing down and will not achieve the one percent growth observers were predicting three months ago," Sapin wrote in an opinion article in the daily Le Monde.

"This year, growth in France will be around 0.5 percent, and there is nothing that would allow us to forecast, at the moment, that growth in 2015 will be much above 1.0 percent," he added.

Sapin also revised upwards the forecast for France's public deficit, saying it would be "above 4.0 percent of gross domestic product" this year.

France had forecast a deficit of 3.8 percent this year and promised the European Union it would get the deficit down to around three percent, the maximum allowed in the bloc.

This commitment too is now increasingly unlikely given slow growth.

In a further blow to the eurozone's hopes of making a recovery, figures showed that Germany, the region's largest economy, had stalled.

According to a flash estimate by federal statistics agency Destatis, German gross domestic product (GDP) shrank by 0.2 percent in the period from April to June, following growth of 0.7 percent in the preceding three months.


Weak link

Analysts have warned for months that France, the second biggest economy in the eurozone, looks increasingly the weak link in a halting recovery as the government battles to push through much-needed reforms.

Prime Minister Manuel Valls had already warned the French people to brace for "difficult" economic times later this year.

The number of people officially out of work rose to a new record in June, to a shade under 3.4 million, prompting the labour ministry to admit that France was in the middle of a "fragile recovery."

Other economic indicators have pointed to tricky times ahead for the French economy, notably a 0.5 percent decline in industrial output in the second quarter.

The latest trade data were also gloomy. The trade deficit, an excess of imports over exports, increased in June, taking the first-half shortfall to €29.2 billion ($39 billion).

Furthermore, the outlook appears pessimistic, with the country's central bank last week forecasting a meagre 0.2 percent growth in the third quarter of the year.

The central bank's forecast was based on a monthly survey of businesses which reported that their output had edged up in July but would be flat in August.

The poor growth figures add to a mountain of domestic problems waiting for Hollande when he returns from his annual holiday next week.

France's constitutional court slapped down the government's proposed Responsibility Pact – which offers businesses around 40 billion euros in tax cuts in exchange for a pledge to create about 500,000 jobs by 2017 – meaning changes will be necessary.

Sapin pledged there was "no question of deviating from the path."

In addition, the spectre of deflation stalks the land, with figures out on Wednesday showing that prices had fallen by 0.3 percent in July compared with the previous month.

This sparked fears that consumers could put off purchases, hoping for prices to fall further, dragging the economy down even more.

"Weak inflation is the product of weak growth," Sapin said, acknowledging that it was "bad news for debt."

The minister called on the European Central Bank to use “all available means to fight deflation and bring the euro to a more competitive level”

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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