France: Can a Tax Cut Offset the Export Drag?

The global slowdown is getting a firmer foothold in France, causing a rise in unemployment and a drop in confidence.

In the first quarter, France's real gross domestic product grew 0.5% from the fourth quarter, when growth was a faster 0.8%. Although consumer buying was vigorous, rising 1.2%, businesses cut their inventories sharply, trimming 0.8 percentage points from real GDP growth.

The first-quarter slowdown suggests that France will grow by less than 2.5% for all of 2000, although the government of Prime Minister Lionel Jospin is still forecasting real GDP growth of 2.7% to 3.1%. The government is also sticking with its plans to cut taxes by 38 billion francs ($5 billion) in 2002, on top of a cut of 57 billion francs this year.

That stimulus will boost domestic demand, but it will not shore up export growth, which has been hurt by the U.S. slowdown and weaker growth in other parts of the euro zone, where France is the second-largest economy. Exports fell 0.6% in the first quarter, and early data suggest another decline in this quarter. The purchasing managers' index fell to 48.1% in May from 49.4% in April, led by a steep drop in the export index.

Weaker foreign demand is also making factory executives more pessimistic. Business confidence for manufacturers fell in May to the lowest level since June, 1999 (chart). And businesses are cutting payrolls. Although France's jobless rate was steady at 8.7% in April, the number of unemployed rose by 5,000. Weaker job markets are, in turn, making French consumers more wary. Consumer confidence fell in May to an eight-month low.

The European Central Bank's surprise interest-rate cut on May 10 will clearly help France's situation, but internal fiscal stimulus will have to do the bulk of the job. That's why the government is sticking with its plan to cut taxes. While that may widen the budget deficit, the cuts should kick in just before the next nationwide elections are called within the coming 11 months.

By James C. Cooper & Kathleen Madigan

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