World economies
France
The French economy slowed as expected in the fourth quarter of last year, as French companies depleted inventories instead of boosting production. The gross domestic product grew 0.3 per cent in the three months to December 2007 and was 2.1 per cent higher than a year earlier. GDP growth for the whole of 2007 was 1.9 per cent, down from the 2.2 per cent increase posted in 2006. The bulk of the GDP deceleration came from inventories, which shaved 0.4 percentage point from growth. Slowing growth may pose a problem for President Nicolas Sarkozy, who was elected in June on a pledge to revive the economy and increase France’s potential GDP growth rate - currently estimated at two per cent a year - by one percentage point.
The slowdown in growth is expected to continue well into 2008. The growth would slow gradually in the first half of this year, with GDP expected to rise 0.5% in the first quarter and by 0.4 per cent in the second quarter. In the last quarter of 2007, production of goods was unchanged, as a fall in manufacturing output was offset by an increase in power production. Domestic demand contributed 2.2 percentage points to GDP growth, while foreign trade shaved 0.3 percentage point from the final result. Private consumption is the main interrogation point for 2008 growth.
In the last quarter of 2007, exports suffered, falling 0.6% from the previous quarter, but an even stronger decline in imports, which fell 1.5 per cent, resulted in the external sector contributing 0.2 percentage point to GDP growth. Economists said there is a clear split between the domestic and foreign sectors. Despite the massive increase in the foreign trade gap in the last three months of 2007, the foreign sector gave a positive contribution to growth on the period. The euro’s appreciation is likely to hamper exports in early 2008. trade deficit: France’s foreign trade deficit widened to EUR39.17 billion in 2007 from EUR28.24 billion in 2006. French Foreign Trade Minister blamed the strong euro as well as the economic slowdown and sub-prime mortgage crisis in the US. for the country’s record trade deficit last year. French provisional, seasonally-adjusted trade figures for January showed a deficit of 3.391 billion eur compared with a deficit of 3.954 billion in December, revised from the reported originally figure of 4.279 billion eur. Exports in January totalled 36.594 billion eur compared with 34.950 billion the previous month, revised from 33.126 billion. Imports were 39.985 billion eur compared with 38.544 billion in December, revised from 37.405 billion.
Business investment will probably slow due to tighter financing conditions and weaker foreign demand, and only consumption is expected to continue to grow and keep the economy going. Unemployment is expected to reach a record low of 7.7 per cent in the first half of this year. The French president, however, is of the view that a possible US recession would have a limited impact on France’s economy as the French economy depends on Europe for 60 per cent of its trade with the rest of the world and on the United States for only 8%. So if the US falls into recession, only this 8% trade would be affected. France’s economy should grow by around two per cent in 2008. update: The International Monetary Fund has also updated its projections for the French economy. It now forecast the French economy to grow 1.5 per cent in 2008, down from two per cent projected in October. The Gross Domestic Product growth forecast for 2008 was below the 1.9 per cent in 2007 and the government estimate of around two per cent. Higher oil prices, appreciation of euro and weakening economic prospects in partner countries would be a drag on growth. However, the growth would accelerate to 1.9 per cent in 2009 and 2.6 per cent in 2010 and 2011. The Fund also predicted that the French budget deficit would increase to 2.8 this year from 2.4 per cent in 2007.
France’s inflation rate remained at a 12-year high in February as energy and food costs reached records. Consumer prices climbed by an annual 3.2 per cent, the same as in January, based on European Union-harmonized methods. That’s the fastest pace since 1996. Prices increased 0.2 per cent from January. French energy prices climbed 18 per cent from a year earlier in February and food rose 4.8 percent, today’s report showed. Services such as health care increased 2.2 per cent. The price increases have affected consumer morale, sending confidence to a record low last month.
Hungary
The government expects GDP to grow by 2.6 per cent in 2008, before recovering to 4.1 per cent growth in 2009. The slide over two years is expected to reflect tough austerity measures designed to rein in the country’s deficit, the highest in the EU at 10.1 per cent of GDP in 2007. The government wants to reduce the deficit to 3.2 per cent of GDP by 2009 and prepare the country for the adoption of the euro between 2011 and 2013. The deficit ceiling in the euro-zone is three per cent of GDP.
The country’s debt level will continue to rise, increasing risks to the forint and economic growth. Failure by the government to successfully implement its deficit reduction program could therefore lead to a forced and potentially destabilising market correction to the exchange rate and the domestic economy. The government wants to cut the shortfall by two-thirds by 2009. It has raised taxes and cut subsidies for products such as natural gas, electricity and medicines to trim the deficit. The government is now working to overhaul education, health care and public administration.
The Organization for Economic Cooperation and Development (OECD) has warned against worsening competitiveness due to massive wage hikes and a high public sector deficit as the main threats facing Hungary’s economy in the near future. The finance ministry is more optimistic, predicting public finance deficit/GDP ratio around 4-5 per cent. OECD analysts note that alongside slowing GDP growth, Hungary’s competitiveness has declined considerably and the external economic environment has not been favourable either.
The organisation listed several factors which made it difficult for the government to slash it to 3pc by 2005 - a criterion for euro-zone entry in 2007-2008. The report warned that efforts to attain the deficit-cutting target are hindered by the spill-over effect of wage increases, political promises to maintain the level of social benefits and a growth target of 4pc, which the OECD sees as overly optimistic. The OECD forecast that measures aimed at curbing fiscal incentives would begin, though at a slower pace than planned by the government. As financial consolidation will likely be a slow process, financial restrictions can be expected.
GDP: According to the forecast, GDP will pick up next year only on the back of an international boom. However, the analysts stress that a faster growth rate is conditional on and conducive to a moderate wage increase and a sharp improvement in competitiveness. That would be accompanied with a certain rise in unemployment. The OECD thinks that if wage increases and public spending fail to decrease as planned, the resultant competitiveness and balance problems could be resolved by continuing fiscal constraints, which, however, may stall fragile growth.
Hungary’s inflation rate remained at more than double the central bank’s target rate in February, reinforcing the general impression that policy makers will raise interest rates again, and probably as early as this month, even though this months annual rate was slightly down on the January one. Hungary’s consumer prices rose in February by 1.1 month on month and by 6.9 per cent year on year. There is still considerable debate among analysts about where end of the year inflation will be, although the consensus number seem to be somewhere in the region of 4.7 per cent.inflation: Seasonally adjusted core inflation was in fact up slightly at 5.3 per cent year on year as compared with 5.2 per cent in January 2008. The monthly rise in core inflation was 0.4 per cent compared with 0.6 per cent in January. Hungarian inflation has now consistently exceeded the central bank 3 percent target since August 2006, heading upward under pressure from global food and energy prices, and following “own goal” inflation pressures due to the increase in state administered prices as the Hungarian government lifted utility bills and social security contributions in an attempt to reduce a record budget deficit.
The February price increases were still largely driven by food and energy costs. The price of natural gas rose 15.4 percent and power prices increased 9.8 percent in a month while the cost of cooking oil rose 4.2 per cent. February’s annual consumer price index reading was thus influenced by a number of factors. It was evidently pushed higher by a rise in fuels prices, the delayed accounting of several regulatory price hikes, but we also saw the ending of the deflation process in consumer durables. Downward pressure was exerted on CPI by the base effects of the fact that several of last year’s sharp price hikes - in e.g. medicines - fell out of the index.
Italy
The OECD in December revised Italian growth forecast down to 1.3 per cent. Confindustria also revised its forecast down, arguing that growth would slow to 1 percent in 2008 from an 1.8 per cent in 2007, citing factors like the rising cost of food and oil and the rise of the euro against the dollar. Such numbers are clearly not encouraging, but arguably downside risk for 2008 is greater even than either the OECD or the Confindustria forecasts reflect. The IMF in their October World Economic Outlook came in with a similar figure of 1.3 per cent for 2008, the Economist Intelligence Unit is forecasting 1.4 in 2008.
During 2007 the Italian government has been running a fiscal deficit of comfortably below the 3 per cent of GDP required by the EU commission.