Stalling French economy highlights challenge for Hollande

AFP, Tuesday 15 May 2012

France's new Socialist president needs to follow through on his tax-and-spend plan which he claims can turn stagnant economy around

France's economy stalled in the first quarter of 2012, official statistics agency INSEE said, highlighting the challenge to Socialist President Francois Hollande as he was inaugurated on Tuesday.

In addition to recording zero growth in the first quarter, INSEE revised its fourth quarter 2011 growth figure down to 0.1 per cent from 0.2 per cent, while maintaining that the eurozone's second biggest economy expanded by 1.7 per cent last year.
The stagnant state of French economic activity was a key factor in Hollande's victory over right-wing incumbent Nicolas Sarkozy, with the Socialist vowing to turn the economy around with a tax-and-spend plan to boost growth.
Hollande was to meet Chancellor Angela Merkel later Tuesday in Germany, where he faced an uncertain reception over his vows to re-open talks on the European Union's fiscal austerity pact so that it focuses more on growth.
He was also to name a prime minister tasked with forming a government ahead of the new cabinet's first session, expected on Thursday.
The figures "add emphasis to the magnitude of the challenge facing the new government to be appointed tomorrow," said analyst Fabrice Montagne at Barclays Research in London.
The Bank of France had previously also forecast zero growth for the first quarter of 2012 and the same for the second quarter.
The European Commission is forecasting overall growth this year of 0.5 per cent in France, in line with Hollande's budget predictions.
But it is expects growth next year of only 1.3 per cent, against a forecast of 1.7 per cent under Hollande's economic programme.
Michel Martinez, chief economist for France at Societe Generale, said Hollande's projections should be on target for this year but that the new government will have trouble reaching its 2013 goal.
"The real uncertainty is about 2013 and the 1.7 per cent forecast seems really too high to me," he said.
INSEE confirmed on Tuesday that France's public deficit stood at 5.2 per cent of gross domestic product (GDP) in 2011, down from 7.1 per cent at the end of 2010.
Montagne said the growth figure for the first quarter was in line with the overall consensus but slightly lower than Barclays had expected.
However the figures showed that "despite weak growth, France has not yet come close to recession."
He said that a credit squeeze at the end of last year, rising unemployment, and "tamed" public consumption would probably weigh on growth in the next few quarters but that household consumption should provide some support.
Surprisingly strong growth in Germany should also support France and the rest of the eurozone, Montagne added.
INSEE said French household consumption was up slightly in the first quarter, with a 0.2 per cent rise, against a 0.1 per cent increase in the last quarter of 2011.
But capital investment fell 0.8 per cent, after growing 1.3 per cent in the fourth quarter.
The country's trade deficit trimmed 0.1 percentage point from overall growth, as imports grew by 0.7 per cent while export growth slowed to 0.3 per cent.
French consumer prices meanwhile remained practically flat last month, rising by just 0.1 per cent on a monthly basis after a jump of 0.8 per cent in March, INSEE said separately.
Annualised inflation dipped to 2.1 per cent, back to the level seen in mid-2011.
The European Central Bank has a set a medium-term inflation target of below but close to 2.0 percent.
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