France Grinds to a Halt!
Despite my talks about the fragile Eurozone economy and my pessimistic outlook for 2007 I have to say that this surprised me. If you had asked me before this news I would have predicted France to come out of the two last quarters of 2006 with a growth rate of about 1.5% on the upside and 1.0% on the downside. Apparently this did not stick and In terms of the annual growth rate going out of 2006 the official figure is now just shy of 2.0% (1.9%) compared to 2.5% before the sudden slowdown in the third quarter.
The French economy ground to a halt in the third quarter of 2006, slowing much faster than expected after a spurt in the second quarter that had led to bullish forecasts for full-year growth.
The weak data, an estimate published on Friday by the statistics agency INSEE, will be a pre-election setback for the government, although prime minister Dominique de Villepin said it was a “pause” that would inspire “even more determination”.
It could mean next week’s eurozone growth figures will be less rosy than had been forecast, taking the gloss off the 12-country region’s recent robust performance.
“This was not expected,” said Christian de Boissieu, who heads the French prime minister’s team of economic advisers. But speaking in Frankfurt, he suggested the third quarter had been a correction after exceptional growth of 1.2 per cent in the previous three months. “I expect some rebound in the fourth quarter,” he said.
Economists blamed a quarterly decline in industrial production and a worsening of the trade balance. “Industrial production is underperforming compared to the rest of the world. Each month we see that France is less and less an exporting economy compared to Germany,” said Emmanuel Ferry, economist at Exane BNP Paribas.
Last month, the IMF had projected growth of 2.5 per cent. “It’s a cruel disillusionment,” said Alexander Law, economist at Xerfi, adding: “In its current state, France is incapable of maintaining growth sustainably above 2 per cent.”
Economists generally see the eurozone’s economic recovery losing momentum as the US slows down and the effects of a three-percentage point rise in January in German VAT feed through. But the European Central Bank sees the underlying growth trend as remaining robust and has already indicated that it will raise its main interest rate again to 3.5 per cent in December.
It will be interesting to see whether Trichet and his lot in Frankfurt will use this sudden French slowdown as a back door to pause in December. If the data keeps on going down for services on a wide Eurozone scale I think this might actually be a working game plan. However, the ECB is stubbornly maintaining vigilance against inflation even though inflation is under the target rate 2% chiefly due to a declining headline impact. Not to worry though :) ... the aggregate monetary indicators, most notably the broad based monetary indicator (M3) is still above target so perhaps a bit of pragmatic monetarism is what await us in December?