French Growth Dips

National statistics institute INSEE, which revised down first quarter growth to 1.1 per cent from 1.2 per cent, said the fall was partly due to a drop in consumer spending and to the fact there were a smaller number of working days in the period.

Economists had expected a fall of 0.2 to 0.4 per cent after a sharp rebound in the first quarter as the economy recovered from a paralysing public sector strike at the end of last year. Consumer spending, hit by high unemployment, fell 1.0 per cent in the second quarter after rising 2.5 per cent in the first and contributed 0.6 per centage points to the shrinkage in gross domestic product (GDP).

 

The smaller number of working days knocked some 0.5 per centage point off second quarter GDP after making an equivalent positive contribution in the first quarter.

Economists said the second quarter figures were slightly disappointing and underlined the difficulties the government facted in reducing France's budget deficit to four per cent of GDP this year and three per cent next year from five per cent last year in preparation for European monetary union.

This is quite alarming. Clearly this is going to weigh on the deficit problem, Credit Lyonnais economist Iain Lindsay told Reuters Financial Television.

The numbers have come in on the soft side of expectations. It makes it look more likely rather than less likely that the government's targets on growth will be hit this year and emphasises the difficulties in hitting this year's deficit targets, said Sean Shepley, economist at CS First Boston in London.

The government, due to present a budget for 1997 later this month which will cut both spending and taxes, is counting on a recovery in the second half to help it meet its deficit reduction targets. It expects full-year growth of 1.3 per cent.

Economists said they still expected a rebound in the third quarter, driven by a rise in consumer spending as people flock to buy new cars ahead of the expiry of a government incentive scheme at the end of September.

It's reasonable to expect a bounceback in the third quarter. You are looking at a recovery of the fall in the second quarter and maybe a little bit more depending on how much the car incentive scheme boosts consumption ahead of (the expiry of the scheme) at the end of September, Shepley said.

I believe the third quarter may be quite strong. The worse the number in the second quarter, the stronger it will be in the third quarter, Philippe Brossard, economist at ABN AMRO said.

The most recent numbers we have got for July and August (car sales) suggest consumer spending will rebound enormously after the dive in the second quarter, he said.

Car sales jumped an unadjusted 22 per cent in July and 29 per cent in August from the same months the previous year.

But economists said the economy could weaken again in the fourth quarter, leaving France on a shaky footing as it enters 1997, the crucial year for deciding which countries will join a single European currency when it is launched in 1999.

Those wanting to join monetary union in 1999 must reduce their total budget deficits to near to three per cent of GDP.

The main problem now is the fourth quarter. With all the gloom we have at the moment, the risk is that we have a bad fourth quarter because of the confidence factor, Brossard said.

It makes the three per cent (1997 budget deficit/GDP ratio) a bit more risky. But at the moment three per cent seems to me quite credible, he said.