Dec. 18 (Bloomberg) -- The French economy will probably expand at a faster pace next year than forecast by the finance ministry as exports and investment revive, helping to reduce unemployment, the government's statistics office Insee said.

``We have a good chance to exceed the 1.7 percent growth penciled in the budget bill'' for 2004, said Insee's chief forecaster Michel Devilliers at a press conference in Paris. Projections for the first half suggest growth may be about 2 percent for the entire year, he said, up from 0.2 percent this year.

The jobless rate in Europe's third-largest economy will probably climb to a four-year high of 9.9 percent in the first quarter, before dropping to 9.8 percent in the second as job creation recovers and a new law on early retirement is phased in, Insee said.

Accelerating economic growth in the U.S., the U.K. and Asia is boosting exports across the dozen nations sharing the euro, allowing the region to emerge from the slowest growth in a decade. Confidence among French manufacturers such as Airbus SAS rose to an 11-month high in November as they stepped up production to meet rising sales.

The U.S. economy, the world's largest, grew at an annualized rate of 8 percent in the third quarter and will probably expand between 3 percent and 4 percent through the middle of next year, Insee predicts. Growth in the euro region is forecast at an annualized rate of more than 2 percent in the first half of 2004.

Fourth-Quarter Pickup

Faster expansion abroad prompted Insee to raise its French growth forecast for the fourth quarter to 0.6 percent from 0.4 percent, helped by a 1.1 percent rebound in exports. Inventory buildup will account for two-thirds of that expansion.

The rebound would have been stronger, were it not for the euro's gain. In the second quarter, a 3 percent appreciation in the Europe's common currency's so-called ``effective exchange rate,'' which is equivalent to a 10 percent drop of the dollar, crimped 0.3 percentage point from second-half growth, said Xavier Bonnet, an Insee economist.

``We may fear a further appreciation of the euro,'' said Devilliers, as the currency rose to a record $1.2395 in Paris late yesterday. The euro was at $1.20 when Insee made its forecasts. ``Still, this is currently more than offset by the rebound in global demand,'' he said.

First-Half Expansion

The quarterly pace of French growth will accelerate to 0.7 percent in the first quarter of next year, Insee said. It will slow to 0.5 percent in the period from April to June as the effect of tax cuts in the U.S. wane and curbs French export growth. Insee didn't provide forecasts for the second half of next year.

The rebound in exports, combined with ``favorable financing conditions,'' will boost corporate investment in coming months, Insee said. The European Central Bank last cut its benchmark lending rate in June to 2 percent, the lowest level seen in France since 1946.

Capital expenditure will climb 0.6 percent in the first quarter and 0.9 percent in the second, the statistics office predicts, adding that these forecast are conservative, given the recovery.

Private sector employment will probably climb by 35,000, or 0.2 percent in the first half of next year, after falling by 40,000 in 2003, Insee said. Falling unemployment will boost confidence and maintain consumer spending at a ``moderate'' pace of 0.4 percent and 0.3 percent, respectively, in the first two quarters of 2004.

Inflation, Tax Cuts

Shoppers will receive little help from consumer prices, Insee said. France's annual inflation rate will probably decline to 1.9 percent in June from 2.1 percent this month, assuming the price of Brent crude oil drops to $25 a barrel in the second quarter from $28 a barrel in the first three months of the year. Brent was trading at $30.55 late yesterday in London.

Prime Minister Jean-Pierre Raffarin is seeking to bolster growth by lowering taxes a net 3.3 billion euros next year. He plans cuts chiefly in income taxes along with a rebate for low- income earners. That would follow about 3.9 billion euros in tax cuts this year.

The first tranche of next year's income-tax cut, which takes place in February, will boost household income by 0.2 percentage point, Insee's Bonnet said. That should have a ``rather limited'' effect on consumer spending, he said.

To revamp growth, France earlier this month won approval from a majority of its European Union partners to keep its deficit above the region's limit of 3 percent of GDP in 2004. It expects to trim the deficit to 3.6 percent next year from 4 percent this year.

``Faster-than-expected growth doesn't mean that deficit problems will be solved'' because the government collects some taxes one year in arrears, said Insee's Devilliers.

Last Updated: December 17, 2003 18:13 EST