Economists see French growth below 1.4 percent

France's economic growth will sink below 1.4 percent in 2012, well beneath a government target, posing tough choices for President Nicolas Sarkozy as he tries to cut the deficit while winning re-election, economists said. A slew of disappointing data from France, culminating in figures last week showing the 2 trillion euro economy posted zero growth in the second quarter, left banks scrambling to trim their forecasts for the euro zone's second-largest economy.
A straw poll of seven banks on Friday produced an average forecast for next year of 1.34 percent growth in gross domestic product, well below the 2.25 percent the government has factored into its budget calculations. Highlighting how swiftly market expectations have deteriorated, a Reuters poll in July had predicted 1.7 percent growth next year.
"There are a number of things playing out: weaker global growth, additional fiscal consolidation and financial stress in the monetary union so we're struggling to see where the positives may come from," said Jacques Cailloux, chief European economist at Royal Bank of Scotland, which forecasts GDP growth of 1.2 percent next year for France.
French officials are currently considering whether to reduce their 2012 forecast, government sources say.
Anxious to shore up France's triple-A credit rating after Standard & Poor's downgrade of the United States placed Paris under market scrutiny last week, the government is finalising a package of fiscal measures to ensure it hits a 2012 deficit target of 4.6 percent of GDP despite weaker economic growth. The reforms, which will include measures such as higher taxes on the super-rich, are due to be unveiled on Wednesday. Morgan Stanley, which this week slashed its forecast for French growth next year to 0.9 percent from 1.6 percent, predicted the government needed to plug a fiscal gap of around 10 billion euros - 0.5 percent of GDP - to meet that target.
With Sarkozy trailing his Socialist rivals in the polls, he has no scope for fiscal actions which might further cool growth, such as sweeping spending cuts. Voters are already bridling at unemployment over 9 percent and stagnant real wages. "If things get worse, it is going to work against Sarkozy," said Michel Martinez, senior France economist at Societe Generale, which is reviewing its growth forecasts for France.
"Growth and purchasing power will be important factors (at the election) because the French more than many other people are very sensitive about prices and their wallets." Part of the weakness in France's second-quarter growth can be explained by one-off factors, like the expiry of a car scrappage scheme. But a broad contraction in consumer spending - the motor of France's economy - suggests the government may fall just short of its 2.0 percent growth target this year.
"For the second half of the year, lower growth rates on average are likely ... The annual growth rate for France is probably going to be in the high 'ones'," said Ken Wattret, BNP Paribas' chief euro zone economist. SocGen's Martinez said he expected growth in consumption in the next two years to halve from its trend rate of 2 percent before the global economic crisis, due to weaker growth and budgetary tightening. This would leave investment as the main prop for growth, he said.
With shares in French banks pummelled amid concerns over asset quality and funding, Martinez said there was a risk that banks' problems might lead to a drying up of credit for households and businesses, mauling growth still further. "My worry is that financial crisis is transmitted to the real economy though the banking sector via tougher credit conditions, halting investment," he said.
BNP is in the process of reviewing its forecast for French growth next year, which stands at 1.6 percent, based on emerging signs of weakness in the broader euro zone, notably economic powerhouse Germany, which is France's main trade partner. German growth slowed sharply in the second quarter to just 0.1 percent, reflecting a weaker global economy, a dip in construction and domestic demand. "We are now thinking that the euro area growth rate could come in at around 1 percent next year, after around 1.75 percent this year," Wattret said.