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Friday, February 22, 2008

French Business Sentiment and Spending on Manufactured Products Fall

French business confidence fell in February to its lowest level in 13 months and spending on manufactured goods laos fell in January as accelerating inflation and slowing economic growth took their toll across the European economy. Insee, the Paris-based national statistics office, said today its index of sentiment stood at 107, the lowest since January 2007 and down from last month's revised 108. Spending on manufactured products dropped by 1.2 percent, the most since September 2006, Insee said in a separate report. Both these figures were worse than most economists had been expecting.

Also in its latest interim forecast the European Commission yesterday cut the growth outlook for France to 1.7 percent from 2 percent in November.

Accelerating inflation, which reached 3.2 percent last month, the fastest pace in at least 12 years, is also weighing on confidence as it squeezes spending by consumers, who account for the biggest part of the economy.

Purchases of manufactured goods, which contribute about 15 percent of gross domestic product, fell 1.2 percent from December. Rising gasoline and food prices and higher borrowing costs dented households' purchasing power.

The January spending drop was led by cars, which slipped 8.7 percent as consumers had bought more than the normal number of automobiles in December in order to beat a "green tax" on high-polluting vehicles that came into effect on Jan. 1. The January rate compared with an increase of 6.7 percent in December. On the other hand, purchases of clothes and leather rose 2.3 percent in January, helped, it seems, by post-holiday discounts.

Still, France may yet weather the coming storm rather better than Spain, Italy and Germany, as record-low unemployment and President Nicolas Sarkozy's 9 billion euros ($13.2 billion) worth of tax cuts buffer the economy against the slowdown. French growth may outpace Germany this year for the first time since 2005, the commission forecast, yesterday, and Prime Minister Francois Fillon reitereated that he hasn't reduced the government's forecast for growth of about 2 percent this year. Personally all this seems much more reasonable to me than some of the other "official" forecasts we are getting at the moment, since France didn't have so many excesses (as eg Spain) on the upside, she may well not feel the contraction so sharply on the downside, and having a relatively younger population and a more stable population pyramid than either Italy or Germany, France has obviously much more short term leeway on the fiscal side, although in the medium term serious structural reform to the health and pensions systems are obviously needed.

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