France: Europe's Bright Light Will Soon Burn Out

France surprised most analysts by surpassing growth expectations for the third quarter. But the supports for that growth were short-lived. And when compared to a year ago, the economy has slowed to its lowest rate in four years.

Real gross domestic product rose 0.5% from the second quarter to the third, better than the 0.3% projected. Consumer spending soared by 1.1% (chart). But because business investment and foreign demand have been sagging all year, French real GDP last quarter stood only 2% above its year-ago level, the slowest annual growth rate since 1997.

Moreover, growth is weakening this quarter, and real GDP in 2002 will struggle to grow 2%. That's because the consumer spending spree was lifted by tax rebates and tax-rate cuts that gave households more income to spend. These stimulus programs will not be repeated soon.

The consumer outlook is also dimmed by slack demand for labor. The jobless rate edged up to 8.9% in October, an eight-month high, with a further rise expected.

In addition, consumer inflation outside energy is accelerating. While overall inflation slowed to 1.7% in the year ended in October, compared to 2% a year ago, nonfuel prices rose 2.3%, much faster than their rate of 1.1% in October, 2000. Weighed down by rising unemployment and shrinking buying power, consumer demand is dropping. Household purchases of manufactured goods fell 0.4% in October from September, when they dipped 0.1%.

France's economic gain is a bright spot for the euro zone since it offset some of the drag coming from Germany, whose economy hasn't grown since the first quarter. But Germany's woes are hurting French exports, which have fallen for three quarters in a row. And with the U.S. now in a recession, France cannot expect foreign demand to contribute any growth to its economy.

Neither can France depend on any help from the European Central Bank. The ECB indicated it will hold interest rates in the euro zone steady until at least the end of the year.

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