France: Don't Expect a Pickup for a While

The French economy has slipped into the doldrums and may be stuck there for a while. Businesses aren't investing, and the government will have to tighten the purse strings in order to comply with the European Union's Stability & Growth Pact.

Consumers saved the day in the third quarter, preventing real gross domestic product from contracting. The economy grew a listless 0.2%, but the pace of household spending picked up, to 0.7%. Consumers are likely the primary engine of growth this quarter as well, amid signs of a stabilizing labor market and, for now, a retreat in oil prices. In October, consumer spending rebounded 1%, after a 0.9% fall in September.

But consumers need some help, and caution over a fragile global economic recovery and a possible conflict in Iraq have made companies hesitant to increase investment. Capital spending fell 0.8% in the third quarter, and factory output dropped 0.3% as companies opted to draw down their inventories to meet demand.

The situation does have some silver linings. Thinning inventories mean any ramp-up in capital spending should lead quickly to busier factories, and weak economies across the euro zone have raised the likelihood of an interest-rate cut by the European Central Bank. Even so, French companies see only a modest improvement in investment and don't expect a real pickup until the second half of next year.

The drifting economy spells more trouble for the government's balance sheet. The 2002 budget deficit was bumped up to 2.8% of GDP on Nov. 20, from 2.6%. The government says the deficit should fall back to 2.6% next year, but that estimate hinges on 2.5% real GDP growth in 2003. Most economists expect real GDP to increase by no more than than 2%. While tax hikes, a la Germany, currently appear unlikely, spending restrictions may be necessary to prevent the deficit from rising above the EU pact's 3% ceiling.

By James C. Cooper & Kathleen Madigan

By James Mehring in New York

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