France: The Pluckiest Shoppers in the Euro Zone

The euro zone is on the mend, and France is leading the recovery. The French upturn, as elsewhere in the region, is developing slowly, but unlike most of the euro zone, France is benefiting from steady gains in consumer spending. The second quarter is off to a good start, and the second-half pace should pick up in response to peppier global demand and expected stimulus from the new government.

French real gross domestic product in the first quarter rose 0.4% from the fourth quarter, when it contracted 0.4% from the third. The gain outpaced 0.2% increases in both Germany and Italy. The French advance was fueled by a 0.2% rise in consumer spending, which had increased 0.3% in the fourth quarter despite the drop in GDP. Inventories and business investment edged higher last quarter, while rising imports offset a pickup in exports.

Spiking unemployment and falling consumer confidence are still limiting both consumer spending and business investment. March unemployment hit a 17-month high, and April confidence dipped to a four-year low amid both job and election-year uncertainties.

But despite those drags, consumer outlays for manufactured goods increased a strong 0.7% in March and another 0.8% in April. French factory output through March has risen for three months in a row, and confidence among manufacturers hit a nine-month high in April as foreign orders gained. All of this means second-quarter GDP should rise in line with the Bank of France's projection of a 0.5% gain.

Still, the policy outlook--especially for tax cuts and labor markets--remains uncertain ahead of the legislative elections on June 9 and 16. Newly reelected President Jacques Chirac is expected to win a narrow majority of Parliamentary support. Chirac wants to cut income taxes sharply beginning this year, loosen work rules, and cut employers' social security contributions to boost demand and create jobs. The cost could be France's inability to balance its budget until 2007, far beyond the 2004 euro-zone guideline.

By James C. Cooper & Kathleen Madigan

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