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France set to miss its fiscal targets

Tuesday, August 12 12:45:37

France's top officials are preparing the ground for another failure to meet fiscal targets, using weak growth and inflation to seek leniency from European partners.

The government has promised to come clean on the state of the economy after the publication of second quarter GDP data on Thursday, which are expected to register barely any growth.

Record-high jobless numbers, 16-year low housing starts and waning industrial output: most indicators already give a bleak image of the economy in the second quarter, with higher consumer spending a rare and insufficient bright spot.

Warning of tough economic times ahead, the government has broken away from a months-long "recovery-is-there" narrative to emphasise the difficulties, eyeing EU rules that allow the possibility of exemptions from targets if growth deteriorates.

Finance Minister Michel Sapin will "tell the French the truth, face reality without hiding anything" after the data is released, Prime Minister Manuel Valls said when asked if the time had come for the government to revise deficit targets.

While officials say the timing and detail of the announcement is still being discussed, economists are convinced this week's data will show France cannot meet its existing targets to bring its public deficit to 3.8 percent of GDP this year and down to the EU's cap of 3 percent of GDP in 2015.

"It's clear they will not meet the deficit target either in 2014 or 2015. We'll be quite far from it," said Societe Generale economist Yacine Rouimi. SocGen has a 3.4 percent public deficit forecast for France in 2015 while the government has so far stuck to its 3.0 percent projection.

A Reuters poll of 25 economists forecast the euro zone's second-largest economy eked out feeble 0.1 percent growth in the second quarter after stagnating in the first quarter, making the government's 1 percent growth forecast for the full year increasingly unlikely.

Data on Friday showed industrial output contracted by 0.5 percent over the quarter. A 1.0 percent quarterly increase in consumer spending, largely due to consumers turning up heaters because of worse-than-usual weather, will help but is unlikely to be enough to lift the economy out of its lull.

The last major unknown for second quarter GDP - stock variation - is volatile, Natixis Asset Management chief economist Philippe Waechter said, adding that it is possible the economy contracted.

Waechter expects 0.5-0.6 percent growth at most for the year and a public deficit above 4 percent of GDP this year and overshooting 3 percent next year.

Low inflation is further complicating the equation for the government in its drive to cut the debt and public deficit. Inflation figures due on Wednesday are forecast to show prices rose by just 0.6 percent year-on-year in July.

The government, which still benefits from record-low borrowing rates, had initially based its budget on a forecast of 1.4 percent inflation this year.

Last year, it revised its growth and deficit targets for both 2013 and 2014 when it published the draft 2014 budget bill in early September. Sapin has said he is waiting for Q2 GDP data before reviewing full-year growth. (Reuters)

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