France's economy will hold up better than most of its euro zone neighbors' this year, but it has not escaped the slowdown, and economic fallout from the terrorist attack on the U.S. could make matters worse. In particular, France's public-sector finances are deteriorating.
Real gross domestic product rose only 0.3% in the second quarter from the first, after gains of 0.5% in the winter and 0.6% at the end of 2000. Falling exports and weak business investment meant manufacturing slowed further last quarter, as did consumer spending.
France is expected to grow 2.25% this year, down from 3.4% last year, and about a half-percent faster than the expected euro zone pace. But the price of that performance will likely be an overshoot in its public-deficit target for 2001 and 2002. Past tax cuts and the economic slowdown have cut revenues, so the central-government deficit through July widened by 11% from the same period a year ago.
Last year, France cut both its value-added tax and fuel taxes. This year and next, with the Socialist government caught between an economic slowdown and elections next spring, more cuts in income taxes--plus a back-to-school benefit and a one-time rebate--will attempt to buoy both consumer spending and the ruling party's election hopes.
With slumping global demand now likely to skid further, the outlook depends on consumers. However, consumer confidence has already dipped sharply, and that happened before the larger-than-expected surge in July unemployment, the third monthly increase in a row. The jobless rate rose to 8.9% in July, after holding close to a two-decade low of 8.7% for most of the year.
Economists at J.P. Morgan Chase & Co. project that France's deficit will swell to 1.6% of GDP both this year and next, double the government's current projection. The European Commission has already admonished France, Germany, and Italy over this growing trend. But with the outlook so uncertain, these governments have little choice.
By James C. Cooper & Kathleen Madigan
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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