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France and the UK: A Tale of Two Economies

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The French government has suffered a raft of disappointing economic releases and bad press in past weeks. After falling 0.1% in September, the statistics office released consumer spending data showing a fall of 0.2% in October. Household confidence fell in November and Q3 GDP results recorded that the economy shrank by 0.1% quarter-on-quarter. Standard & Poor’s have also downgraded France’s credit rating and criticised its high taxes and lack of dedication to structural reforms.

Austerity Appears to be Working in the UK

On the other hand the UK economy seems to be on the up. The UK government, through its austerity measures has worked hard to tackle government spending (in contrast to France) and to bring the deficit down and as a result has hung on to its AAA credit rating. However, there are fears that the UK government with its Help to Buy scheme (whereby it guarantees mortgages for those with only a 5-20% deposit) is stoking another housing bubble.  Also incomes remain doggedly stagnant, even as consumption shows some signs of recovery – private final consumption increased by 0.9% in 2012 and further gains of 1.9% are forecast for 2013. This would indicate that the UK consumer is in danger once again of spending beyond his or her means. The opposition Labour Party has argued that the financial crisis has become a cost of living crisis and this argument has found resonance with many UK voters.

Government Net Borrowing 2007-2014

Govt net borrowing 07-14










Source: Euromonitor International from IMF/OECD/Eurostat/national statistics
Note: Data for 2013 and 2014 are forecast

Lingering Unemployment Stifles Both Economies

However both economies are suffering from lingering unemployment – although once again the French economy looks in a weaker position. In both countries, unemployment is not expected to return to pre-crisis levels until beyond 2020; however the French rate of unemployment remains more than three percentage points higher than that of the UK. This translates to almost three-quarters of a million more unemployed people in France than the UK – despite the fact that the working age population in the UK is larger.

Unemployment Rate: 2007-2014

Unemployment 07-14









Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics
Note: Data for 2013 and 2014 are forecast

Mixed Outlook for 2014

The outlook for 2014 is mixed, with risks on the downside. The UK remains vulnerable because of its large banking industry, its heavily-indebted consumers and lingering unemployment. The French economy is also vulnerable because of the reasons outlined above but also due to its heavy proportion of foreign debt. This debt load could come back to haunt the government once the Fed begins its taper – because a taper will act to increase investors’ risk aversion. Nevertheless, both economies are expected to post positive economic growth in 2014 – 1.9% for the UK and 0.5% for France. Of the two, France is more vulnerable and the need for reform is becoming ever more urgent, although the UK is hardly out of the woods yet.

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