Nov. 10 (Bloomberg) -- France's economy expanded at the fastest pace in more than a year in the third quarter, suggesting European growth is accelerating and providing central bankers leeway to raise interest rates.

Gross domestic product increased 0.7 percent from the second quarter, when it rose 0.1 percent, the government said today in Paris. Economists expected a 0.5 percent gain, according to the median of 32 estimates in a Bloomberg survey.

Stronger growth in Europe's third-largest economy may give the European Central Bank more room to raise borrowing costs for the first time in five years. ECB President Jean-Claude Trichet said as recently as Nov. 9 that the bank is prepared to raise its main interest rate, currently 2 percent, to contain inflation.

``The whole French economy is looking brighter and this buttresses the ability of the ECB to raise interest rates,'' said Ed Teather, European economist at UBS AG in London. He predicts a quarter point increase in December and a 3 percent rate by September. ``While inflation is the reason for raising rates, growth numbers such as these will allow them to do it.''

A 13 percent drop in the euro against the dollar this year has brightened prospects for European exporters such as France's Schneider Electric SA, the world's largest maker of circuit breakers.

European Growth

In the euro region, growth probably accelerated to about 0.4 percent in the third quarter from 0.3 percent the previous three months, the European Commission said Oct. 13. This quarter, the economy may expand 0.6 percent, it said.

French consumers stepped up spending as oil prices retreated from a record and government-subsidized hiring pushed down unemployment from a 5 1/2 year high.

The French inflation rate slid to 2 percent in October from 2.4 percent in September, Insee, the national statistics office, said today. Crude oil prices have fallen 17 percent from an Aug. 30 record of $70.85 a barrel. They fell today to less than $59.

The fastest expansion since the second quarter of 2004 in France, when GDP grew 0.8 percent, came as Prime Minister Dominique de Villepin authorized curfews this week to quell two weeks of riots in France's impoverished ghettoes. Last year, 17.4 percent of immigrants were unemployed, compared with 9.2 percent for non-immigrants, according to Insee.

Finance Minister Thierry Breton went on Europe 1 radio to announce the third-quarter data 30 minutes before the scheduled release by Insee, the national statistics office.

ECB Inflation Concern

Signs of faster growth have increased speculation that the ECB will soon raise its benchmark interest rate from a six-decade low. The Frankfurt-based bank has a ``clear indication of an economic recovery,'' ECB council member Axel Weber said in Munich yesterday.

In its monthly bulletin today, the ECB said the ``short-term outlook for inflation has deteriorated significantly.'' Inflation in the euro-region was 2.5 percent in October, the European Union's statistics office said Oct. 28, the 10th month it exceeded the ECB's ceiling of just below 2 percent.

The euro weakened to a two-year low of $1.171 on Nov. 8. It was trading at $1.1776 as of 2:51 p.m. in Paris.

The ECB may increase its refinancing rate as early as next month, futures trading suggests. The implied rate on the three- month contract for December settlement was at 2.44 percent, up from 2.11 percent on Sept. 5.

Jobs, Oil

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 14 basis points more than the ECB rate since the currency's launch in 1999.

The French unemployment rate fell to 9.8 percent in September, the lowest since July 2003 as new government-subsidized short-term work contracts cut the number of jobless by 100,000. The rate reached 10.2 percent in May.

``The broad picture looks better than expected,'' said Emmanuel Ferry, a senior economist at Exane-BNP Paribas SA in Paris. ``A downward correction driven by a relapse in consumer spending is very likely in the fourth quarter. That's why I remain cautious.''

The drop in energy costs has helped lift optimism among executives. European business confidence rose to a nine-month high in October. French industrial output rose for a second month in September, Insee said in a separate report today.

Industrial Production

French factories, utilities and mines increased production by 0.2 percent from August, national statistics office Insee said in Paris today. The August increase was revised to a 1.2 percent gain from 0.8 percent.

Schneider on Oct. 20 raised its target for 2005 earnings for the second time this year after increasing demand in Europe and the U.S. boosted third-quarter sales. The company based near Paris said sales growth picked up in September.

``Things are looking better on the industrial side,'' said Michael Penn, an economist at Merrill Lynch & Co. in London. He forecast the French economy grew 0.8 percent in the third quarter. ``The third quarter looks quite strong overall and the second half of the year is likely to be better than the first.''

France's trade deficit narrowed to 1.7 billion euros in September from 2.2 billion euros in August as exports rose 4.6 percent to a record 31.2 billion euros ($36.7 billion), the customs department said today. Imports rose 2.7 percent to 32.9 billion euros.

The economy will expand between 1.5 percent and 2 percent this year and about 2.5 percent in 2006, Breton said today, reiterating his targets The International Monetary Fund sees growth of 1.5 percent and 1.8 percent for this year and next.

The French statistics office is scheduled to release a breakdown of second-quarter GDP on Nov. 18.

Germany and Italy are both scheduled to report third-quarter GDP on Nov. 15. The European Union's statistics office Eurostat will release data for the economy of the dozen nations sharing the euro on the same day.

To contact the reporter on this story: Simone Meier in Paris at smeier@bloomberg.net

Last Updated: November 10, 2005 09:08 EST