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Sancho Panza

Imf Warns Of Negative Spiral In France As Recession Looms Again

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Telegraph 4/7/14

'France is on the cusp of a fresh recession as services contract sharply and the country braces for yet another round of austerity cuts, with record jobless levels likely to bedevil Francois Hollande’s presidency for years to come.

Markit’s PMI services gauge for France fell for the third month to 48.2 in June, pointing to an outright fall in GDP following zero growth in the first quarter.

The International Monetary Fund cut its growth forecast this year from 1pc to 0.7pc, warning that there would be no “appreciable decline” in French unemployment until 2016. “Volatile and uneven leading indicators point to the risk of a stalled recovery,” it said.

The IMF said public debt should peak at 95pc of GDP next year but a “growth shock” would push it to 103pc by 2016. The Fund warned of a “negative spiral of low growth and falling inflation” that is pushing up real borrowing costs and further choking investment, already dismally weak. Core inflation was 0.3pc in May.

The economic relapse is a political disaster for Mr Hollande, already the least popular leader in modern times with a poll rating of 23pc, and reeling from a crushing defeat by the far-Right Front National in European elections.

The country is being left behind by Spain and others as they reap the first rewards from supply-side reforms, although the France’s Socialists grumble that they are merely under-cutting France with deflationary wage cuts in a 1930s-style race to the bottom that ultimately benefits nobody.

Mr Hollande is paying the price for a failed strategy in his first two years in office when he clung to the old model and relied on tax rises rather than spending cuts to cover austerity packages. The state sector has risen to 57pc of GDP, suffocating the private economy.

Yet the country is also caught in a vicious circle as it tries to meet EMU deficit rules, forced to push through successive austerity packages without offsetting monetary stimulus or a weaker currency. The IMF said France’s exchange rate is over-valued by 5-10pc.

The effect of austerity has been to erode the tax base, leaving the budget deficit stuck at over 4pc of GDP. France has gained remarkably little from fiscal tightening equal to 5pc of GDP over the last three years. Undeterred, it is now pushing through extra cuts of €50bn by 2017 under the new premier Manuel Valls, dubbed the “economic Clemenceau” for his willingness to endure casualties stoically. The biggest hit will come next year, raising the risk that economy will once again to fail to achieve escape velocity.'

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The French obviously need to get their housing market 'moving' again.

Perhaps they can hire Carney after the election when we don't need him any more. He's from Canada, probably speaks a bit of French.

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