By Leigh Thomas

By Leigh Thomas

PARIS (Reuters) - France's northern port of Rouen usually bustles in October with wheat-laden ships destined for distant markets but the worst harvest in three decades means there is no chance this year of a trade boost from one of its most reliable exports.

Indeed, foreign trade is shaping up to be one of the weak spots of the recovering economy.

"Over the last year things have taken a turn for the worse and we're losing (export) market share," said Vladimir Passeron, head of economic forecasting at statistics office INSEE.


INSEE predicts that poor trade figures will shave 0.4 percentage points off economic growth in 2016, taking it to 1.3 percent -- less than the 1.5 percent projection that President Francois Hollande's government built its budget on.

With a presidential election in six months, Hollande had hoped by now to be reaping the gains from a 43 billion euro ($48 billion) payroll tax credit scheme he launched in 2013 to reverse years of lost competitiveness.

But payoffs from the program are arriving too late to help the deeply unpopular leader, who has yet to say whether he will run for a second term.


France's overall trade balance has retreated from a record deficit reached in 2011, fueled by the fall in the euro over the last two years and a lower oil import bill following the plunge in crude prices since mid-2014.

But with firmer consumer demand at home fuelling faster growth in imports than exports, the trade deficit has returned to near-record levels when energy is excluded -- despite the government's now-forgotten pledge to return it to balance.

Such promises were made on the assumption that the tax credit scheme would make employing French workers cheaper and help restore firms' profitability, among the lowest in Europe, so that companies would then invest and hire.

Under the scheme, known as the Tax Credit for Competitiveness and Jobs or CICE, firms can seek a tax credit of 6 percent of their wage bill on salaries worth up to 2-1/2 times the minimum wage.

While company margins have recovered to pre-financial crisis levels of 2008, wages have drifted higher, albeit at a much slower pace than beforehand.

"It's a shame that companies are raising wages to keep peace in their labor forces at a time of low inflation," said Hollande's former top economic advisor Laurence Boone, who is now chief economist at French insurer AXA.

France has regained competitiveness versus Germany -- with which policy planners were obsessed -- but at the same time it has lost ground against faster-reforming southern neighbors such as Spain or even Italy.

French unit labor costs had risen much faster than in Germany until Hollande came into office in 2012, but have since risen just half as much, according to ECB data that puts the German increase at 8 percent.

"Sure we've made headway against Germany, but the southern countries and Spain in particular, have really been holding back wages," INSEE economist Dorian Roucher said.


The cost of employing Spanish workers has fallen 2 percent since 2012, which is bad news for French industries offering little added-value compared with their Spanish competitors.

A case in point is the car industry. Spanish production surged past French in 2013 and is now second in Europe only to Germany at 2.2 million vehicles. France's production has meanwhile been stalled since 2013 at just under 1.5 million cars, according to data from the ACEA industry body.

Overall, exporters have won back no lost ground during Hollande's term, with France's share of euro zone trade with the rest of the world stagnating at 12 percent.

But it may still be too early to write off the CICE.

A government-sponsored study found last month that the scheme had saved or generated 50,000 to 100,000 jobs, though it said it was too early to judge its broader economic impact.

The Treasury is also optimistic that France is on the path to regain its competitive mojo, though even it expects the trade deficit to widen next year to nearly 50 billion euros.

Against that backdrop, a better wheat harvest in 2017 would be a welcome development.

($1 = 0.8928 euros)

(Editing by Catherine Evans)

Latest From ...