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French GDP outlook trimmed, budget to miss targets

PARIS - French economic growth will easily be weaker than the government’s forecasts this year and in 2008 while the budget deficit will be wider than Paris is predicting, a Reuters poll showed on Monday.

Median forecasts from a poll of 12 economists surveyed Oct. 8-12 showed growth in the euro zone’s second largest economy would be 1.8 percent this year and next following 2.2 percent growth in 2006.

That represents a significant downgrade from the July survey, which was taken before the turmoil in financial markets and put growth at 2.1 percent in 2007, rising to 2.2 percent next year.

The new forecasts are also below the bottom end of the 2.0-2.5 percent range which the government is predicting for both years on which it has based its 2008 budget.

‘There could be downside risks if there is a dampening of consumer spending, especially if inflation picks up as expected,’ said Alexander Law, economist at Xerfi consultancy, whose growth forecast was in line with the median.

The Reuters poll found a median budget deficit forecast of 2.5 percent of GDP, whereas the government has forecast a deficit of 2.4 percent this year which it says will fall modestly to 2.3 percent in 2008.

The poll figures will add weight to criticism from France’s European partners who say its budget forecasts are unrealistic and do not stand up to government promises to cut the deficit and the debt.

President Nicolas Sarkozy has argued that France needs extra time to push through difficult reforms that will boost growth.

Consumer morale

The French economy has been driven by consumer spending while companies have been struggling to stay profitable in the face of the strong euro and competition from abroad.

But the poll said consumer spending growth would likely slow to 1.9 percent this year from 2.3 percent in 2006, before increasing modestly to 2.2 percent next year.

‘I think that the slowdown in the housing market will weigh more and more on consumption,’ said Olivier Gasnier, economist at Societe Generale.

‘You might have a bit of help from tax cuts, but I think there will be fewer jobs created, lower purchasing power by households worried about the housing market and that will progressively weigh on confidence and consumption.’

Inflation is also expected to hurt consumer budgets. The poll forecast that consumer prices will pick up in the final quarter of this year and at the beginning of next year.

Analysts are expecting a rise in food and energy costs to filter down into the data.

French food and yoghurt maker Danone DANO.PAlast week became the latest company to pass on the pain of soaring global commodity prices to consumers, saying it would raise dairy goods prices in France by 10 percent from Nov. 21.

The poll also forecast the trade deficit will worsen from 30.1 billion euros this year to 30.5 billion euros in 2008.

French companies complain that the strong euro is hurting their exports. Sarkozy has noted their complaints and blamed the European Central Bank for the strength of the currency, hinting it should cut interest rates.