Doubts over French growth optimism

Doubts over French growth optimism

http://www.ft.com/cms/s/0/16f83fec-5271-11dc-a7ab-0000779fd2ac.html

By Peggy Hollinger in Paris

Published: August 25 2007 03:00 | Last updated: August 25 2007 03:00

When Christine Lagarde, France’s finance minister, admitted earlier this week that it could be challenging to meet the government’s target for economic growth this year, she was rapidly put back in her place.

Less than 24 hours later Eric Woerth, budget minister, insisted there would be no revision to the government’s figures, despite the global financial crisis and sorely disappointing growth in the second quarter.

François Fillon, prime minister, was not far behind, reiterating that economic growth of 2.25 per cent was still achieveable in the government’s view.

On Friday Ms Lagarde also backtracked on her comments, saying during a press conference that she expected economic growth to pick up steam in the second and third quarter. “Second half growth will be clearly better,” she said.

Yet, even before the current credit squeeze, which according to the International Monetary Fund could force a cut in estimates for global growth, analysts had reduced this year’s forecast from about 2 per cent to about 1.8 per cent on the back of the poor second quarter showing.

“It will be very difficult to get even 2 per cent this year,” said Mathieu Kaiser, economist at BNP Paribas. “You would need growth of 0.9 per cent in each of the third and fourth quarters and France has rarely grown by that pace in the last cycle.”

The prospect of slower than expected economic growth is raising serious doubts over the ambitious programme of reform being planned by President Nicolas Sarkozy.

The first phase, concluded with Friday’s new tax breaks for homeowners, was aimed at boosting consumer spending. But economists are asking questions about the government’s ability to pay for the raft of feel-good measures without a severe deterioration in the already bloated budget deficit.

Having delicately calculated the €11bn ($15bn, £7.4bn) cost of the measures on the back of a 2.25 per cent increase in growth, Mr Sarkozy will have little room for manoeuvre for more significant reforms if the domestic slowdown continues or the global financial crisis filters through to European economies.

“We are going to have a dangerous evolution in public finances,” said Jean-Christophe Caffet, economist with Natixis. “We could even go past the 3 per cent of GDP threshold in 2008, without exceptional measures.”

The fundamental problem is that while Mr Sarkozy has focused on reforms to boost demand, it is the supply side that is starving for the changes that will make a lasting difference to the performance of the economy.

Writing in the daily Le Figaro this week, economists Christian de Boissieu and Jean-Hervé Lorenzi urged the rapid adoption of measures to promote the development of small businesses, to liberalise the market for goods and services, and to improve France’s record on innovation.

Ms Largarde sought to address the latter point on Friday by announcing an increase in research tax credit.