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France Begins To Look Like A Peripheral Country‏

ByDanske Markets
Published 03/22/2013, 08:19 AM
Updated 05/14/2017, 06:45 AM

The short-term outlook for France looks more like that of a peripheral country than the strong German economy to which France used to be compared.

PMI numbers for France and Germany have diverged significantly and in February French manufacturing PMIs were even worse than the Spanish and Italian numbers.

The situation in France might not just reflect that the business cycles are out of sync. In contrast to Germany, France has structural problems, headwinds from fiscal tightening will continue and a weakening housing market with declining construction activity has begun to pull growth down.

The Wrong Direction
President François Hollande has implemented reforms aimed at improving competitiveness and fiscal sustainability but the short-term impact on growth seems to be limited. Some of the reforms are even a step in the wrong direction in our view.

The continued absence of sufficient reforms implies a significant risk that France could face a lost decade with very little growth.

The biggest risk factor seems to be the housing market. Affordability looks stressed and the construction sector's expectations of future activity are alarmingly low.

A negative spiral could start with a decline in house prices which could spill over to growth and increase government debt. In such a situation, fiscal sustainability could be threatened - particularly if investor confidence is weakened.

Negative headlines on France haven't frightened investors. If Hollande abstains from taking the necessary steps to restore France's competitiveness and improve fiscal sustainability, spreads to Germany could slowly begin to increase.

To Read the Entire Report Please Click on the pdf File Below.

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