BUSINESSWEEK ONLINE : AUGUST 30, 1999 ISSUE
BUSINESS OUTLOOK

France: Consumers Show Some Joie de Vivre


Thanks to a more dynamic job market and rising buying power, consumers continue to set the pace for France's recovery. For the euro zone's second-largest economy, increased household spending should trigger a virtuous cycle: Stronger domestic demand will create more jobs and better income growth, leading to more spending.

For the year ended in the first quarter, real gross domestic product rose 2.3%, with consumer spending up 2.2%. In the second quarter, real retail sales advanced a solid 1.7%. Then in July, car buying hit a record high, suggesting that consumers are boosting their spending in this quarter as well.

The spending spree, though tame compared with the U.S. binge, is being fueled by improved job prospects. The French jobless rate slipped from 11.4% in May to 11.3% in June, equalling the six-year low hit in April. More than 290,000 new jobs were added in the year ended in the first quarter, led by hiring by high-tech and service companies. Job creation is the aim of a recent bill to cut the workweek from 39 hours to 35 hours in 2000. Whether the Socialist Party measure will expand payrolls, though, remains to be seen.

Meanwhile, extremely mild inflation also is helping consumers. In July, consumer prices were up only 0.4% from a year ago. Slowing inflation and modest wage gains mean that real household buying power may rise by 2.5% this year, forecasts the government's statistical agency, INSEE, on top of a strong 3.5% advance in 1998.

It's little wonder that consumers are more optimistic. The consumer confidence index rose to -8 in July, near the record -7 in February (chart). (The index has never been positive since it began in 1987.) Consumer demand has also lifted business confidence and led to the recent improvement in industrial production and a surge in home building. For all of 1999, French consumer spending is projected to increase by about 2.3%. If so, household spending could increase by more than France's overall GDP for the first time in three years.



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France: Consumers Show Some Joie de Vivre

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