France: A Stronger Economy On A Fragile Footing

France's economy is picking up strength, but the rewards are not yet accruing to the nation's workforce. As a result, French business executives are growing upbeat, but the mood among consumers is still dour. The split could curb demand later on.

Real gross domestic product grew by 0.7% in the fourth quarter, and overall growth in 2003's second half was revised up sharply from initial estimates. Private economists think preliminary data to be released on May 12 will show real GDP expanded another 0.5% or so in the first quarter. France is growing faster than the total euro zone.

Demand in 2004's first half should be helped by a rebound in exports, now that the euro has dropped 6% against the U.S. dollar since February. Better export prospects are fueling the brighter mood among executives. The April reading on overall business confidence remained at 104, the highest in three years. And last month's purchasing managers' index showed factory activity improving with output, orders, and foreign demand all strengthening.

Executives Turn Bullish on Growth
The PMI survey, however, showed no improvement in jobs, and therein lies the root of pessimism among France's consumers. Hiring prospects are few, and the unemployment rate in March stayed at a high 9.8%. The survey of consumer confidence has recently been revised, meaning no historical data are available, but the new index has shown little improvement over the past five months because of job jitters, as well as renewed fears over terrorism. In April, the index rose to -20, from -22 in March.

The danger is that consumers, whose spending makes up about 55% of GDP, will curtail their purchases unless the job situation turns around. Already the 2.3% drop in April vehicle sales has been blamed on job jitters. And both February and March spending on manufactured goods fell.

The French government cannot risk any slowdown in economic growth and the attendant weakening in tax collections. The budget deficit hit 4.1% of GDP last year, far above the European Union's limit of 3%. The government has pledged to get the deficit below 3% by 2005. But any falloff in tax revenues will complicate that goal.

By James C. Cooper & Kathleen Madigan

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