France: Consumer Spending Softens the Slowdown

The euro zone may not be as insulated from the U.S. slowdown as the European Central Bank said only a few weeks ago.

Based on recent data, German prospects have already taken a hit. Now, French officials have lowered their 2001 growth forecast, from 3.3% to 2.9%, mainly reflecting expectations of weaker foreign demand. Analysts say that figure may still be too high.

Overseas weakness is already hitting output. French industrial production fell in January for the first time in four months, led by declines in food, metals, and microchips, leaving production at the start of the first quarter no higher than the fourth-quarter level. Also in January, French exports tumbled, and February business confidence dipped for the fourth month in a row.

The plus in French growth prospects is strong consumer spending, which is buoyed by tax cuts, solid labor markets, and lower oil prices. Consumer outlays for manufactured goods, about a fourth of all purchases, fell 0.9% in February, but that followed a large January gain. Spending so far in the quarter is strongly above the fourth-quarter level.

However, France will not avoid the global slowdown completely, and that may add to budget pressures in the coming year, leading up to presidential and parliamentary elections in 2002. Despite the lower growth forecast, the government left its 2001 deficit target at 1% of gross domestic product. Also, it has yet to fully finance the 35-hour work week. And on Mar. 22, 5.4 million civil servants struck over the government's offer of a 0.5% pay hike, half the union demand. So far, the Socialist government led by Prime Minister Lionel Jospin is resisting, but it may be hard-pressed not to give in with elections approaching. Civil servants are 25% of the labor force.

France and the euro zone may soon get help from the ECB. In a sharp reversal, top ECB officials now admit that the impact of slower U.S. growth may be more significant than anticipated. That lays the groundwork for a rate cut as soon as early April.

By James C. Cooper & Kathleen Madigan

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