Broadly in line with what the French press had reported (EUR6-8bn) before today's official announcement, PM Fillon today heralded a further EUR7bn in budget cuts for 2012. This comes as a compensation for an expected faltering economic growth - the government had revised its projection to 1.0% from 1.75% for 2012 on October 27 - to maintain the deficit to GDP ratio reduction trajectory, pledged with the European institutions (2011: 5.7%, 2012: 4.5%) as credible. These measures come on top of EUR10.4bn worth of savings the government announced on August 24 for 2012. Between 2012 and 2016, the total amount of measures is worth EUR111.9bn (c. 5.5% of GDP).
 

Our take

Beyond the headline figure of EUR7bn of new savings committed by the government (which came within the range of expectations reported ex-ante by the press), we welcome the fact that the amount of savings efforts will actually increase each year until 2016 (instead of slowing down, as per the August 24 announcements). Furthermore, the trend remains up after consolidation between the two sets of measures. As a consequence, the government is obviously not looking to play a tight game, as market pressures have been intensifying since the past few days, notably on Italy. We believe it is a timely move (before the 2012 budget bill is finalised) to ensure that the 2012 fiscal deficit target (4.5% GDP) is met. Therefore, this constitutes a concrete act, adding to the efforts of the prime, finance and budget ministers, who have been fairly vocal in recent weeks in their commitment to do whatever is needed to achieve France's fiscal consolidation plan.

While these measures constitute concrete acts for the multiyear stability program, we would nevertheless highlight that the government's forecasts could still prove too optimistic for 2012 and more likely so beyond next year. We currently project a +0.7% GDP growth in 2012, some 0.3pp below the government's newly revised forecast. Besides, the government still expects growth to come back to some sort of a trend rate as soon as 2013 to 2.0% until 2016. Not only do we think that the potential growth rate of the French economy is below that, but even more importantly, the path is very unlikely to show a direct return to the trend pace. Considering the level of business confidence triggered by the deepening of the financial crisis and the amount of fiscal consolidation that is still to be done in other euro area countries, we consider that the overall activity path in France is likely to be bumpy and slower than in a textbook recovery. We would therefore highlight that significant risks (rather skewed to the downside, in our view) lie in our own - more conservative - baseline scenario for France. Finally, considering the current extreme uncertainty, medium-term forecasts need to be taken with a great pinch of salt.



source: BarCap