Strained finances trip up French firms' recovery role

Strained finances trip up French firms' recovery role

PARIS - Squeezed by thin margins and high debt, French companies will struggle to ramp up the investment spending on which President Francois Hollande's government is banking to underpin a fragile recovery.

Hollande's government has hung its 2014 recovery hopes on business investment taking over consumer spending's traditional role as the motor of growth in the euro zone's second largest economy.

It expects growth to reach at least 0.9 per cent in 2014, counting on a corporate tax credit scheme to boost overall business investment by 1.5 per cent and even more for spending on new equipment even though spare capacity is ample at nearly six percentage points below the long-term average.

"It's all just political mumbo-jumbo," said Pierre Vauterin, chief executive of CBA, which makes airplane parts outside Paris and employs about 65 people.

"I don't see any grounds to prophesy an investment rebound," added Vauterin, who said his company's 2014 budget would focus what little investment was possible on improving quality and performance rather than boosting production.

Under the tax credit scheme designed to cut labour costs by 10 billion euros ($13.8 billion) next year, the government sees average French operating margins rising to 28.7 per cent from an estimated 28.2 per cent this year. By 2015, it hopes to have cut labour costs by 20 billion euros or six percentage points.

But France has the weakest margins in Europe, and analysts say such improvements will do little in the short term to restore French profitability to levels enjoyed elsewhere in the euro zone, where the average operating margin is nearly 38 per cent.

"There's a real problem with profit margins and this problem is going to hold back any recovery because there will be fewer means to invest," Bank of France head of structural analysis Gilbert Cette said.

Forecasting 0.7 per cent growth on average for next year, economists polled by Reuters are not too far short of the government's own 0.9 per cent target.

But if any risks emerge to threaten that scenario, the corporate sector will struggle to pick up the slack. According to estimates compiled by Thomson Reuters, analysts see roughly flat capital spending by the 40 largest companies listed on France's CAC-40 index.

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