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'Broken down' French economy grinds to a halt

AFP/The Local · 14 Aug 2014, 08:33

Published: 14 Aug 2014 08:33 GMT+02:00

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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.

Story continues below…

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”

AFP/The Local (ben.mcpartland@thelocal.com)

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