France Will Miss Deficit Target Next Year

france-gdp-growth-annualfrance-government-budget

France should review 2013 deficit target with EU partners: IMF | Reuters.

The IMF has a poor history in predicting budget deficits in Europe, but that won’t stop it from issuing its biased and optimistic forecasts. For 2013, IMF economists have forecasted a 3.5% budget deficit for France next year against France’s own target for a 3.0% budget deficit.

France is a member of the growth-challenged EU. Next year, the ECB is predicting a 0.4% decrease in GDP across the Eurozone with France barely growing above  stall speed at 0.4%. The charts above illustrate that it will be difficult for France to reduce its budget deficit in the face of poor economic growth.

A more realistic prediction for 2013 is more of the same with a budget deficit of around 5.0%. This larger deficit will not have an impact of French government bond yields. The world central banks have printed lots of money, which has to be invested somewhere. France possesses a deep, liquid bond market and an implicit guarantee of more ECB money printing through OMT, if necessary. Look for French yields to fall a bit further before leveling out as we get deeper into 2013.

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