August 14, 2013 5:37 pm

Hollande has a heavy workload to provide a sustainable recovery

Francois Hollande©Reuters

France’s socialist government on Wednesday doubtless felt more relief than satisfaction after the country’s statistics agency confirmed that Europe’s second-biggest economy had grown at the fastest clip since the start of 2011.

The 0.5 per cent growth, in seasonally-adjusted terms, during the three months to the end of June came in at more than double the consensus forecast and draws a line under two previous negative quarters that President François Hollande would probably rather forget.

GDP growth and manufacturing

GDP growth and manufacturing
Disparate measures

The figure, which was helped by solid export growth and private consumption, also validates Mr Hollande’s July 14 statement, much questioned at the time, that “economic recovery is here”.

Just a few days ago, even Pierre Moscovici, France’s economy minister, appeared unsure: a local paper interviewing him reported that he had in effect revised down the government’s own forecast for 2013 – a line that later had Mr Moscovici scrambling to deny he had made any such cuts.

“Everybody is surprised by the high number,” says Fabrice Montagné, an economist at Barclays in Paris. “And everyone is cautious to expect as much in future quarters.”

That, analysts say, is Mr Hollande’s problem. Battling to overcome the recent recession, which has bruised his standings in the opinion polls, France’s socialist president has vowed to invert the unemployment curve at a time when recovery is far from consolidated.

Dario Perkins of Lombard Street Research argues that one of the challenges is to create jobs when recession and the wider problems in Europe have left profitability among French companies weak.

“Awful profitability seems to rule out a recovery in employment, which in turn makes a decent consumer recovery look rather far-fetched,” he wrote in a research note on Wednesday.

With a general recognition that future economic growth will probably be insufficient to reduce the record 3.28m unemployed in France, Mr Hollande and his administration have opted for a raft of government schemes to help create jobs.

Among them are programmes such as “Jobs of the future”, which the government is funding to help the country’s unqualified youth find jobs in the health and other non-commercial sectors. Through a series of financial incentives, it also wants the private sector to absorb 70,000 young people in the hope of training them to replace retirees.

With Wednesday’s better than expected growth figures, Mr Montagné puts the government’s chances of inverting the unemployment curve by year-end at 50-50.

On other fronts, the government also has its work cut out. After the official summer break, Mr Hollande has said that he will push pension reform, considered a vital part of efforts to reduce the budget deficit.

But that has already sparked concern among the country’s trade unions, which have promised to hold a series of strikes. Meanwhile, Mr Hollande’s insistence that the reforms would not be sweeping has only served to rile former President Nicolas Sarkozy’s opposition UMP party, which accuses Mr Hollande of not moving boldly enough on the reform issue.

Then there is the thorny and related issue of next year’s budget, discussions for which will begin in September. Last month, the French president underlined that he would forge ahead with budget cuts as part of efforts to bring the country’s fiscal deficit in line with EU limits.

There would be “less spending in 2014 than in 2013”, Mr Hollande told local media after participating in a vastly scaled-down Bastille day parade. This year, the fiscal tightening is expected to be between 1.5 and 2 percentage points of gross domestic product and another percentage point to come next year.

But that, added to VAT rises due to be phased in at the start of 2014, which will doubtless weigh on private consumption, makes the road ahead far from smooth.

“0.5 per cent today is a very nice number but we cannot expect the same number in the third or fourth quarters,” says Philippe Waechter, chief economist at Natixis Asset Management in Paris. “There’s a lot of work left to do.”

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