Without major reforms French growth will continue to fall short says Capital Economics

Without major reforms the French economy will continue to fall short of consensus forecasts, according to Capital Economics.

The French economy contracted by 0.1 per cent in the third quarter, with exports and investment both falling. While French firms debt to relative to equity and financial assets is lower than the Eurozone average but the economy faces severe challenges.

Capital Economics highlighted France's inflexible labour and product markets as holding back potential growth. The fact that labour costs have not fallen relative to Germany due to low productivity growth is also a major cause for concern.

The London-based consultancy suggest that France may be losing ground to other eurozone countries that have made more radical reforms. While French exports have declined, Spanish and Portuguese exports have grown significantly. French corporate profitability remains weak and has fallen three per cent in real terms since mid-2011. 30 per cent of French corporate output accrues to profits compared to 40 per cent in comparable Eurozone economies.

Pointing to the National Institute of Statistics and Economic Studies survey of manufacturing firms, there are indications of a further drop in investment in 2014. This means that any job creation will most likely lag labour force growth and be dependent on state subsidy.

James Howat, European economist:

Overall, French firms are unlikely to provide much offsetting support for the economy as the Government imposes yet more austerity measures over the coming years in order to meet its budget deficit target of 3% of GDP by 2015. We expect French GDP growth to barely accelerate from 0.2% to 0.5% in 2014, weaker than official and consensus forecasts for growth of around 1%."The warning comes on the same day that CQS founder, Michael Hintze, speaking at the Reuters Global Investment Outlook Summit, said the French economy could become a "major pothole" for investors.