France: Business Is Weighing Down the Recovery

The French economy remains in better shape than many of its euro zone counterparts. But an uneven recovery will hamper President Jacques Chirac's plans to introduce more tax cuts and increase spending in the 2003 budget.

Just as in other countries, France is dealing with a troublesome trend: Business is weighing down the recovery. Second-quarter real gross domestic product came in below expectations, edging up just 0.5% for a second straight quarter. While household spending improved, businesses reduced spending by 0.4%, drew down inventories at a faster clip than in the first quarter, and added the fewest jobs since 1996.

Moreover, hope of a pickup in the second half is dimming. Businesses are holding back on capital spending because of weak financial markets and wobbly economic recoveries around the globe. The August factory purchasing managers' index showed conditions are improving only gradually, and French companies are still hesitant to add workers.

So far consumer spending has held up, but there are some signs of weakening. New-car sales in August declined a sharp 17.7%, the fourth consecutive drop. Housing starts were soft during the three-month period ended in July, although home sales have remained strong. And consumer confidence, already down for two consecutive months, could further weaken, with unemployment standing close to a two-year high of 2.44 million.

As a result, GDP will likely miss the government's forecast of 1.4% growth for this year, and officials are talking down the 3% estimate for 2003. Slow growth and falling tax receipts have pushed up this year's budget gap through July to $36.4 billion. The deficit is expected to hit 2.6% of GDP this year, from 1.4% in 2001. That hurts the chance of a balanced budget in 2004, as promised to the European Union. The gap also makes repeating this year's 5% cut in income taxes much tougher for 2003.

By James Mehring in New York

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