French travails

By Mike Peacock
November 12, 2013

The Bank of France’s monthly report forecasts growth of 0.4 percent in the last three months of the year, up from an anaemic 0.1 percent in the third quarter. That still makes for a fairly doleful 2013 as a whole.

France is zooming up the euro zone’s worry list, largely because of its timid approach to labour and pension reforms. Spain has been much more aggressive and is seeing the benefits in terms of rising exports (and, admittedly, sky-high unemployment). So too has Portugal.

Tellingly, both the Iberian countries have had the outlook on their credit ratings raised to stable in recent days while S&P cut France’s rating to AA from AA+. It remains at a far stronger level but the differing directions of travel are clear.

French President Francois Hollande hosts a conference today on youth unemployment. Germany’s Angela Merkel (who held a similar get-together in July), and the EU’s Van Rompuy and Barroso are due to attend.

With jobless rates among the young at 50 percent and above in countries like Spain and Greece, any talk of economic recovery rings hollow. But what to do? The July summit in Berlin came up with precious few solutions.

European Commission President Jose Manuel Barroso damned Paris with faint praise last night, saying its 2014 budget was “satisfactory” but that the government needed to do more to reduce unemployment, which is running at nearly 11 percent. Hollande, suffering record low poll ratings, has promised to get the rate moving downwards by the end of the year, a pledge most economists doubt will be met.

There was a warning for Germany too with EU economics commissioner Olli Rehn signalling that Brussels will look at whether Germany’s giant trade surplus is fuelling economic imbalances, a charge laid squarely by the U.S. Treasury but vehemently rejected by Berlin.

Stronger German demand for goods and services elsewhere in the euro zone would surely help recovery gain traction. The counter argument is that in the long-run, only by improving their own competitiveness can the likes of Spain, Italy and France hope to thrive in a globalised economy.

Germany is in altogether more robust shape than France. Today, the government’s panel of economic advisers, traditionally knows as the “wise men” publishes its annual report, including growth, trade, inflation and unemployment forecasts for next year.

The panel may also have something to say about the European Central Bank’s surprise interest rate cut. Two ECB men who are thought to have spoken  out against last week’s cut – Jens Weidmann and Joerg Asmussen – are speaking today.

UK inflation numbers will cue up the Bank of England’s quarterly inflation report on Wednesday. It is always a major set piece and will be parsed for any glimpses of contradiction with the forward guidance that interest rates are unlikely to rise until late 2016. With an economy recovering robustly and inflation well above its two percent target, markets question whether rates will take that long to rise. Inflation is expected to have edged down to 2.5 percent in October.

The Bank says it will only move when unemployment falls to seven percent or below and expects that to happen very slowly. The consensus is that the jobless rate will get there in late 2015 or even sooner and that Mark Carney will have to acknowledge that, maybe as soon as Wednesday.

This is an interesting one for the markets. With the Fed having deferred any withdrawal of stimulus and years away from raising interest rates, and the ECB cutting rates again, the UK stands out like a sore thumb as the major currency country where policy tightening is starting to hove into view.

The other potential headache for the Bank – though it professes not to see a problem so far – is a housing market boasting double digit price increases in parts of the country, most notably London. Overnight, the Royal Institution of Chartered Surveyors’ closely-watched survey showed the government’s scheme to help home buyers helped push its house price reading to its highest since mid-2002.

Crucially, the ratio of sales to stocks of properties hit its highest level since the start of the global financial crisis, suggesting an increasingly tight market. RICS has already called on the Bank of England to limit the rise in house prices to no more than 5 percent a year. It is running at double that in London.

Finance minister George Osborne is speaking later with critics saying his “help to buy” scheme is ramping up the market at just the wrong time.

India’s new central bank governor, Raghuram Rajan, who has shown no reluctance to act, speaks at the Bank of Italy on speculative bubbles and their effect on monetary policy. Looks topical!

Italy is back in the debt market offering treasury bills prior to a full bond auction on Wednesday. The runaway success of its retail bond – which raised 22 billion euros, making it the biggest single bond sale by a European government – has removed any funding pressure. Plenty of trouble elsewhere however, with political wrangling over the 2014 budget unabated and a final Senate vote on banning Silvio Berlusconi from public office looming large.

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