Thursday, May 13, 2004

It's the economy, stupid

In a surprise announcement the French national statistics office, INSEE, stated that economic expansion in France has exceeded expectations in the first three months of the year. The forecast for growth of GDP had been 0.5 per cent but appears to be 0.8 per cent, up from 0.6 per cent from the last two quarters of 2003.

This has caused much rejoicing in the French government. Prime Minister Raffarin has announced that the French economy “has come back toward growth” and recently appointed Finance Minister Nicolas Sarkozy, still President Chirac’s potential successor said: “France is now in a position to play a bigger role in global growth.”

Others, in particular, what the International Herald Tribune calls “private economists” have been more cautious, pointing out that INSEE had not given a precise break-down of the components of the GDP growth, but seems to have relied on an increase in household spending. Unfortunately, the last three months coincided with the first of the twice-yearly sales in France and household spending always goes up at those times.

The strong euro is still making exports difficult and the French government is looking to ways of increasing domestic consumption. Nicolas Sarkozy has proposed that Sunday shopping hours should be extended – always contentious in France – and that individuals should be allowed to deduct up to 150€ in credit card repayment from their income tax. We shall have to see whether this proposals go through.

Meanwhile the OECD has announced that the economic outlook world-wide is good and getting better. It is particularly good in North America and Asia. But it has been lagging behind in Continental Europe. However, with its customary optimism the OECD envisages that “the rising tide of the world economy would lift the European boats”.

However, there is no getting away from the fact that the economies of the eurozone have been performing disappointingly. They are, as the OECD says, sluggish and seem unable to overcome their poor performance. The advice given to them is one we have heard many times before and consists essentially of greater flexibility in fiscal and labour policies and in mortgage and housing markets. The Chief Economist seems to have missed out on the importance of bi-annual sales in stores.

To read the statement made by Jean-Philippe Cotis, Chief Economist of OECD click here

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