Consumer Spending Will Take A Holiday

French shoppers went on a binge in June, but almost all of the largesse swept into car dealerships. After the spree, such factors as higher taxes will keep consumers on a tight rein.

Consumer outlays of manufactured goods jumped 4.2% in June as the French took advantage of government auto subsidies that ended on the 30th. Car sales in June surged 46% from a year ago, but then dropped 8.7% in July. The end of the car subsidies also hurt business optimism in July. The French Institute of National Statistics (INSEE) said executives were less upbeat about prospects over the next three months. However, all of the increased pessimism was in the auto industry.

Before the spring quarter, consumers lagged behind most other sectors. In its final revision to gross domestic product, INSEE confirmed that real GDP grew 0.7% in the first quarter compared with the fourth, to stand 3.4% above its year-earlier level. But consumer spending was up just 1.8% from a year ago.

The upturn is firmly in place, but cutting the public deficit and sustaining the franc will slow growth. Tax hikes, including a two-percentage-point rise in the value-added tax, will offset a 4% rise in the minimum wage. And the Chirac government must cut the deficit to 3% of GDP by 1997, from 5.1% now, even as it tries to help France's unemployed.

To lift growth, the Bank of France began to cut interest rates in July. And yet, on Aug. 1 the franc, helped by France's low inflation, hit a four-month high against the mark. So if unemployment rises, the Bank of France may ease again even if the Bundesbank does not.

But will another rate cut help? A 1994 report by the Bank for International Settlements showed that France is less sensitive to interest rate shifts than Germany or the U.S. That's because 80% of bank loans to households carry fixed rates, and French businesses rely more on internally generated funds than on borrowing. Thus, a rate cut could backfire if it did little to help the economy but weakened the franc.

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