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France's economy turns corner, but only to smash into wall of debt

French economy | France's economy turns corner, but only to smash into wall of debt Ian Fraser

The French economy may not have not made quite the assured recovery that Germany has, but it it did grow faster than expected in the first quarter and is showing promising signs of being on the mend.

However this has not impressed Dagong Global Global Credit Rating Co which on June 1 issued a stinker of a note on la République Française.

In the first quarter of 2011, France’s GDP grew at 1%, the biggest rise since spring 2006, according to official statistics from INSEE. When compared with a rise of just 0.3% in the final quarter of 2010, and a median forecast of 0.6% for the first quarter from economists, it gave the distinct impression the country is on the mend.

Other good news wrapped in the INSEE figures included that manufacturing production surged by an impressive 3.7% in the first quarter, its strongest growth for at least 30 years. Household consumption was also up, though only slightly.

The OECD also recently produced a bullish prognosis, saying the eurozone’s second largest economy is on track to grow by 2.2% in the current year, up from 1.4% in 2010, before easing slightly to 2.1% in 2012.

The OECD believes that spare capacity in the French economy will tame inflation, with headline inflation falling to 1.6% in 2012. The OECD also said it expects consumer spending to hold up, partly in view of its much lower household indebtedness than countries like the UK. The OECD said unemployment would fall to 9% by the end of 2012. It is currently around 9.6%.

The OECD also welcomed measures introduced by the government of Nicholas Sarkozy, who has been president since May 2007, to reduce the country’s fiscal deficit. France plans to cut its deficit from 7% in 2010 to 4.6% of GDP by 2012 and 2% of GDP by 2014.

US credit ratings agency Fitch Ratings recently affirmed the country's AAA long-term rating with a stable outlook. Analyst Maria Malas-Mroueh said:

"The AAA rating in France is supported by its diversified and healthy economy, its social institutions, civil and effective policies and financial flexibility to confirm its status as a major benchmark sovereign issuer in the euro area."

However, Dagong has little truck with these green shoots. On June 1 the Beijing-based credit ratings agency placed France's "AA-" credit rating on "negative watch", concerned about the country’s high debt burden, fragile financial system and sluggish domestic demand. Dagong's research paper followed its downgrade of the UK’s sovereign debt on May 24.

Dagong also predicted that the government of Sarkozy, who faces re-election in 2012, would struggle to rein in the deficit saying the picture is likely to darken in the mid-term as France’s debt burden continues to grow.

Government debt stood at 81.7% of French GDP last year, up 17.9 percentage points from the pre-crisis year of 2007. Dagong expects this to climb as a proportion of GDP due to rigid expenditures, including on generous state pensions and debt-interest payments. The ratings agency predicted that France's deficit will remain stubbornly at 3% to 5% of GDP over the next five years.

Dagong also said that France's economic growth would average 1.7% a year in 2011-15, much lower than the OECD and other forecasters' predictions, citing concern that high unemployment and inflation would erode consumer spending power.

The sole point on which Dagong and the OECD were agreed was that the French banking system is massively exposed to dodgy assets, including exposure to peripheral EU member states' debt, much of which has been successfully palmed off on the Frankfurt-based European Central Bank. The OECD said:

"Debt restructuring in EU peripheral countries could prolong turmoil in sovereign bond markets, harming French banks, which are highly exposed to those markets.”

Dagong is not alone in criticizing Sarkozy's economic policies. French right-wingers are also outraged by his failure to deliver "la rupture" with France's socialist past that he promised ahead of his election to president in 2007. In a tirade in the Wall Street Journal, Pascal Salin, a professor of economics at Université Paris-Dauphine, wrote:

"Sarkozy's proposal[s], far from being a break with France's recent past, [are] a continuation of government attempts to improve the lot of workers by punishing business owners, an impulse embodied most infamously by the 35-hour work week law passed by the administration of Socialist Prime Minister Lionel Jospin."

Dagong ruffled a few feathers in July 2010 when, in its first foray into international ratings, it downgraded several western nations declaring that its goal was to "correct the defects" of the existing system and offer a counter-weight to Western agencies such as Standard & Poor's and Moody's.

Further reading on France and the future of the French economy:

Tags: economic recovery , EU , European Central Bank , France , GDP growth , sovereign debt
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