French GDP Shrinks as Hollande Faces Job Cuts, Recession

The French economy shrank in the fourth quarter and revisions put it in recession earlier in the year as manufacturers slashed tens of thousands of jobs and President Francois Hollande squeezed the budget deficit.

Gross domestic product dropped 0.3 percent in the fourth quarter from the previous three months, national statistics office Insee said today. Economists had forecast a 0.2 percent drop, according a Bloomberg News survey. Insee’s revision of the first-quarter 2012 performance to a -0.1 percent drop means Europe’s second-largest economy dipped into recession in the first half for the first time since 2009.

France, like others among the 17 nations using the euro, is suffering in the wake of the region’s sovereign debt crisis. Yet while neighboring Germany is showing signs of recovery in confidence, exports and manufacturing, Hollande is grappling with shrinking private investment, job cuts by companies such Renault SA and pressure from European partners to speed budget cuts and an economic revamp.

“Recent macro data suggest that France may be about to significantly underperform the rest of the region,” JPMorgan Chase economists David Mackie, Raphael Brun-Aguerre and Alex White said in a note to clients. “While the rest of the region looks to be stepping up at the start of the year, France looks to be stepping down.”

In all of 2012, the France showed no growth, while Germany expanded 0.7 percent. German GDP fell 0.6 percent in the fourth quarter, the Federal Statistics Office in Wiesbaden said today.

Recession Expectations

Since then, manufacturing and services have been picking up in Germany while dropping in France, according to the Purchasing Manager’s Index. January’s flash PMI’s put the spread between the countries’ service industries at the widest since the data was first collected in 2006 and the difference in manufacturing at the highest in almost two years.

French GDP has now recorded three quarters of declines since emerging from the recession induced by the collapse of Lehman Brothers Holdings Inc. at the end of 2008 and beginning of 2009. Economists expect output to drop again in the current period, putting France in recession, Bloomberg Surveys show.

Like about half the euro-area countries, France is “in recession or quasi-recession,” Industry Minister Arnaud Montebourg said today on Europe 1 radio. France is working to “loosen the pace of austerity,” he said.

In the fourth quarter, a 1.2 percent drop in investment by non-financial companies, as well as lower government spending, meant domestic demand gave no lift to the economy, Insee said. By contrast, net exports bolstered GDP by 0.1 percentage point.

Rising Joblessness

With jobless claims at a 15-year high and a trade deficit that was the second-largest on record last year, Hollande has pledged to shrink government spending by 60 billion euros ($81 billion) over five years, cut in payroll taxes and is ease labor regulation in a bid to improve competitiveness.

Those efforts have been lauded by economists and organizations including the European Commission and the International Monetary Fund.

Even so, France’s Socialist government has his work cut out if he is to reduce joblessness and exports by the time his mandate runs out in 2017, economists say.

France’s share of European exports dropped to 9.3 percent in 2011 from 12.7 percent in 2000, while the share of manufacturing in its economy has declined to 12.5 percent from 18 percent, according to the government’s own estimates.

Target Struggle

Finance Minister Pierre Moscovici said yesterday that the government may have to cut its growth forecast for 2013 and may struggle to meet its target of reducing the budget deficit to 3 percent of GDP next year from 4.5 percent.

“France is in quite a unique position,” said Gilles Moec, co-chief European economist at Deutsche Bank in London. “The fiscal retrenchment is now reaching its peak while in most other countries it was hit in 2011 and 2012. Plus the corporate sector has been late in adjusting and that’s resulting in a steep increase in unemployment.”

Jobless claims have increased for 20 straight months, leaving more than 3 million people out of work, the highest since January 1998. PSA Peugeot Citroen SA, Alcatel-Lucent and Titan International Inc. are among companies reducing staff.

“Looking forward, the outlook remains grim,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. “Rising unemployment and severe fiscal consolidation are the main factors that will weigh on domestic spending. Although we expect an improvement in global economic conditions will support growth, France will probably benefit less due to its weak competitive position.”

Hollande knows the turnaround won’t happen overnight.

The condition of France in five years is “the question that matters in my eyes,” Hollande said Nov. 14 at the first semi-annual press conference since he became president last May. “I want to be judged, when the time comes, on employment and growth.”

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