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​Figure of the week:


US April unemployment

​France: Economy on probation

One year after his electoral success, President François Hollande faces a major credibility challenge. In a recent poll, only 31% indicated confidence in his economic policies—an endorsement that has halved since the beginning of his mandate—and his rating is likely to deteriorate further following more weak data, including consumer confidence, industrial output and trade. Moreover, record high unemployment (12% in February), weakening corporate competitiveness (strong EUR and fiscal adjustments) and high public debt (95% of GDP in 2014) are making the deficit adjustments even more painful. As a result, European Commissioner Olli Rehn suggested that France may need an additional two years to reach its fiscal deficit target of -3% of GDP (by 2015), subject to further action in relation to structural reforms, including labour markets and social security provision. While the impact on growth of austerity measures should soften in the ST, the need for fiscal revenue generation and budget cuts remains significant, amounting to around EUR20-30 billion.

US: Labour market

Non-farm payrolls increased by 165,000 in April, markedly above expectations, data for the previous two months were revised sharply upward and unemployment fell to 7.5%. However, the Fed unexpectedly announced that it might increase its future asset purchases. This may reflect other labour market conditions. Indeed, a broader measure of unemployment (including marginallyattached workers) deteriorated to 13.9%, the workweek fell -0.6%, temporary employment increased, the participation rate remained at the lowest since 1979 and the median duration of unemployment was 17.5 weeks, well above the peak (12.3 weeks) of any previous recession. Meanwhile, the April ISM manufacturing index barely remained in expansionary territory, falling from 51.3 to 50.7, while non-manufacturing slipped from 54.4 to 53.1. March construction spending fell -1.7% mo/mo.

India: Interest rate cut

Last week, the Reserve Bank of India (RBI, central bank) again cut the key policy interest rate (repo) by 25bps. This was the third cut of 25bps so far this year. The RBI’s action reflects an easing in headline and core inflationary pressures against a
background of weaker economic growth in 2012 and indications of that trend continuing into H1 2013. Wholesale price inflation fell to 5.96% y/y in March (6.84% in February) and is now within the RBI’s target 5-6% range for the first time in over three years. However, the RBI is likely to remain cautious in its monetary stance, particularly as the current account deficit remains large. Expect GDP growth to regain some momentum but not to return to annual rates of +9% before 2015 (around +7% in 2014).

Eurozone: New high debt/GDP ratio in 2012

In 2012, government deficit ratios in many countries decreased moderately but in some countries, including Greece and Spain, they increased, despite attempts to address the shortfalls. The overall government deficit/GDP ratio in the eurozone declined from -4.2% in 2011 to -3.7% in 2012. The highest deficits last year were recorded in Spain (-10.6%), Greece (-10%), Ireland (-7.6%), Portugal (-6.4%) and Cyprus (-6.3%), while France recorded -4.8%. Germany was the only country with a surplus (+0.2%). The consolidated gross debt/GDP ratio for the eurozone increased from 87.3% in 2011 to a new high of 90.6% at end- 2012, reflecting increasing debt levels—EUR 8,225.8 billion in 2011 to EUR 8,601 billion in 2012—and weak economic growth. At a disaggregated level, the highest debt ratios in 2012 were registered in Greece (156.9%), Italy (127%), Portugal (123.6%) and Ireland (117.6%), while France recorded 90.2% and Germany 81.9%.