French Economy Ground to Halt in 2nd Quarter

PARIS — The French economy ground to a halt in the second quarter, the government reported Friday, posing a challenge to President Nicolas Sarkozy as France grapples with the growing costs of managing Europe’s debt crisis.

The French slowdown comes as growth stalls in a number of other countries across Europe. The continent’s biggest economy, Germany, is also likely to feel the impact as France, its largest trading partner, pulls back on imports.

“What worries us is that the core euro area countries were the ones carrying the growth” for Europe, Jens Sondergaard, a senior European economist at Nomura, which cut its forecast for German growth after the French economy’s poor showing. “And now you suddenly have flat growth in one of them, and that in itself is worrying.”

News that France’s gross domestic product fell unexpectedly to zero from April to June capped a tumultuous week in which Mr. Sarkozy interrupted his vacation to fight concerns that the country might lose its AAA credit rating if it cannot bring down a high debt and deficit.

The government also closed ranks to protect French banks after they slumped on rumors over their health. It imposed a 15-day ban on short-selling starting Friday, and opened an investigation into the market turbulence.

Although the French finance minister, Francois Baroin, pledged Friday that France would cut the budget deficit despite the gloomy growth report, a cooler economy could make it harder. It means the French government might need to resort to even to deeper budget cuts if it is to meet its target of paring its deficit to 5.7 percent this year.

French growth had been on a more positive trajectory — first-quarter growth, although only 0.9 percent, was the economy’s best quarterly showing in five years.

But consumers pulled back on spending in the second quarter, especially after the expiration of a cash-for-clunkers program the government had used to stoke new car sales.

While the government stuck to its optimistic forecast of 2 percent growth for the whole year, French shoppers seem inclined to remain prudent.

“People are anticipating future difficulties, not necessarily because of austerity yet, but because everything from gas to food is expensive,” Thomas Richard, a consultant at Kurt Salmon, said as he passed by a Monoprix grocery store in a leafy suburb of Paris. “They are paying more attention to their spending.”

While few people think France can come under market attack the way Italy and Spain have recently, they acknowledge the country can’t stay immune from the troubles of their euro-zone neighbors.

“The government does a lot, and we must leave time for programs to be put in place,” said a bank teller who would only give her first name, Isabelle. “But France is intertwined with Portugal, Ireland, Greece and even the United States, which have been hit. So we are waiting for a slowdown.”

The French economy is far more dependent on domestic demand than Germany, with its strong export sector. Unemployment in France remains high at 9.2 percent, while joblessness among youth, a particularly sensitive problem, is 22.8 percent.

Mr. Baroin played down the figures Friday, saying slower growth was expected after a faster run in the first quarter. But he acknowledged on French radio that the government would need to reduce the deficit with savings that “won’t hurt the most vulnerable in the economy.”

The International Monetary Fund said in a recent report that it expected France to experience a “robust” recovery over the next two years, despite plans to further consolidate its finances. In a sign things were calming for the moment, the yield on the French 10-year bond fell below 3 percent on Friday, and the spread with German bunds — considered the safest in Europe — shrank to 63.1 percentage points, after spiking at 89 points last week.

But there is a big risk that growth and exports would weaken if the economies of France’s major trading partners did not revive, the I.M.F. said. Any major downturn in the Spanish and Italian economies in particular would post a “significant” problem for French growth, the fund added.

What is more, because France has high public debt, and its banks are significantly exposed to weak southern European countries, the risks to growth would become bigger if the euro crisis is not stemmed, the fund said.

The deficit is expected to fall to 5.7 percent of gross domestic product this year, the I.M.F. said, while the ratio of debt to gross domestic product will be 85.3 percent — a source of concern among investors who have started targeting Spain, Italy and any country with high debt and low growth, no matter what their stature.

Mr. Sarkozy this week instructed his ministers to find ways to cut the deficit and debt, which are the highest of any AAA country. Still, Mr. Sondergaard cautioned against looking too darkly at France’s fiscal position. The ratings agencies reaffirmed France’s AAA rating this week, and the budget situation in France “is considerably better than other countries, not just in the euro area but around the globe,” he said.

Article source: http://www.nytimes.com/2011/08/13/business/global/french-economy-ground-to-halt-in-second-quarter.html?partner=rss&emc=rss