France sees recovery struggling to gain momentum

France’s economy is set to grow by only 0.2 per cent in the second quarter of 2014, the central bank forecast today, hindered by faltering company morale.

The outlook comes despite a pro-business push by the government seeking to tame unemployment and cut the deficit.

The Bank of France estimated that the euro zone's second-biggest economy would also grow 0.2 per cent in the first three months of the year, half the euro zone average according to a Reuters poll of economists. Germany is forecast to grow 0.7 per cent.

Economists polled by Reuters expect on average that the INSEE national statistics agency will report first quarter growth of 0.2 per cent for France when it publishes GDP data for the period on May 15th.

President Francois Hollande has made cutting unemployment, at 10.2 per cent, his priority, but has made little headway, driving his approval ratings to a record low of 18 per cent, according to an OpinionWay poll released yesterday.

He hopes to spur economic recovery by phasing out €30 billion in payroll tax on companies over the next year. Although Mr Hollande has billed the move as a major shift towards more business-friendly policies, companies’ outlook remained tepid and lagged behind morale in other major euro zone countries.

The central bank gave its estimate in its monthly business climate survey for April which showed morale in the industrial sector slipped to 98 from 99 in March, pulling back from the index’s long-term average of 100.

In a sign of still weak demand, factories’ idle capacity was reduced only marginally last month to 76.4 per cent, still well below the long-term average of 81.5 per cent.

In the services sector, the indicator was unchanged from March at 94. Business leaders polled in both sectors said their cash positions had improved despite cutting prices for clients and that they expected activity to improve this month.

"After monthly data pointing to downwards risks to the first quarter, surveys are now sending bearish signals into the second quarter," Barclays economist Fabrice Montagne said.

“Eventually, the capacity to rebound will depend on the recovery in investment and consumption, which remains highly dependent on the overall political and social environment,” he added.

INSEE will report GDP on Thursday using new international rules to account for research and development spending and military hardware investment.

Eurostat estimates that could boost France's total GDP level by two to three percent, although the impact should be minimal on percentage changes from one period to another - the general measure of economic growth.

However, an increase of up to three percent in total nominal GDP would have the benefit of reducing France’s public deficit ratio slightly.

On that basis, the 2013 deficit would be 4.1 per cent of GDP instead of the 4.3 percent the government originally reported, according to Reuters’ calculations, helping the government as it struggles to meet a pledge to bring the deficit in line next year with an EU-agreed limit of 3 per cent.

The government says it will meet the target. The European Commission expects the French deficit to come in at 3.4 per cent next year. (Reuters)