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Italy, Spain… France? The next domino begins to topple

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Awful, calamitous, horrifying – these are the types of adjectives best applied to recent economic releases from France. The potential negative effects on Canadian investors are more subtle than the case of an emerging markets slowdown, but should become more apparent as the market digests the deteriorating economic conditions in the euro zone.

Recent economic data indicates that the famously inflexible French economy is following Spain and Italy into deep recession. Industrial production for January, expected at –2.7 per cent in year over year terms, came in far worse at –3.5 per cent. February's consumer spending results were released at –2.9 per cent year over year, almost a full percentage point below expectations.

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Investors are focused on the ongoing economic collapse in Italy and Spain and yet in terms of consumer spending, French data is actually worse. And, with gross domestic product 23 per cent larger than Italy and almost 7.5 times the size of Greece, the French economy has a much larger effect on global economic activity. France, however, is not a resource-intensive economy. Further economic weakness is unlikely to have anything beyond marginal effects on commodity prices.

Instead, economic weakness poses two dangers to Canadian investors; credit market weakness and export competitiveness. The primary lesson of the euro crisis is that Canadian bank stocks are not immune from continental credit-market weakness. If France continues to slide towards economic oblivion, the country's major banks are likely to suffer in the form of non-performing loans (particularly to small businesses) and declining loan growth.

Global investors are now reassessing the financial and economic health of Europe in the wake of eurocrats' comically poor performance in Cyprus. The value of the euro relative to the U.S. dollar declined 2.5 per cent in the last two weeks of March. The falling euro will eventually create competitive issues for global and Canadian exporters. SNC-Lavalin Group Inc., for instance, will be at a disadvantage when bidding against European engineering firms for projects in the emerging markets.

At some point, leadership in Europe will realize the disastrous economic effects of its current tough love program of austerity. They have, however, shown remarkable stubbornness; and as long as this continues, Canadians will have to watch for the fallout from the continent's widespread economic hardship.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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