Tuesday, February 19, 2013

France's fiscal tightening is inhibiting growth

France seems to be the only EMU nation who is undergoing a larger fiscal tightening in 2013 than it did in 2012.

Source: JPMorgan

While many of its austerity measures are clearly necessary, such action (combined with poor private sector competitiveness) is translating into a significant divergence in growth between France and the rest of the Eurozone. As discussed earlier (see post), the French composite PMI (manufacturing + services) has deviated sharply to the downside.

Source: JPMorgan

With this weakness in the corporate sector, it was not surprising to see Hollande announcing that France will miss its target on GDP growth this year.
Fox News: - French President Francois Hollande has said his country will miss its economic growth target this year. Speaking during a brief visit to Athens on Tuesday, Hollande said that "everyone knows that for 2013, we will not reach our target, which was 0.8 percent."
There may be a lesson here for the US, which is quickly approaching the so-called "sequestration" (see discussion). An ill timed, sharp fiscal tightening could have a severe impact on a nation's economic growth.

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