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France: The Economy Muscles Up


Business Outlook: France

France: The Economy Muscles Up

The best of 2000 is yet to come for the French economy. Powered by a vigorous recovery in household demand and strong exports, French industrial activity is picking up steam, and businesses are boosting their capital spending, as well as their payrolls. As more hiring begets more spending, this virtuous cycle is expected to fuel economic growth of about 4% in the second half.

Based on the Bank of France's May survey of some 12,000 businesses, the BOF forecasts that real gross domestic product will grow 1% in the third quarter (a 4% annual rate), after a projected 0.9% advance in the second quarter. First-quarter GDP grew 0.7%. The central bank said that May industrial activity rose markedly across all sectors, with capacity utilization hitting a 10-year high. May order books were bulging and inventories were skimpy, with especially strong demand in the auto, construction, and telecommunications industries.

Amid emerging production bottlenecks and some spot shortages of labor, businesses are investing--both to expand production and to increase productivity. The latest quarterly investment survey, showing very optimistic capital-spending plans among manufacturers, corroborates that finding. Survey data also show that manufacturers are very confident about the strength of future demand, a key factor in investment decisions.

The outlook for foreign demand remains solid. Although exports dipped in April, they rebounded in May, says the BOF. More important, France's consumer spending is supported by solid fundamentals: First-quarter employment growth was the fastest on record, and consumer confidence is at an all-time high. Not surprisingly, recent surveys show that optimism among retailers especially, and businesses generally, is very high.

In addition to rapid improvement in the job markets, which is generating better income growth amid low inflation, the coming income-tax cut, totalling 1.7 billion euros, will give spending--and the economy--a further boost in the second half.By James C. Cooper & Kathleen MadiganReturn to top

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