France's economy will probably grow 2.3 percent this year, the fastest pace since 2000, as demand from China and the U.S. boosts exports and encourages investment, the Paris-based national statistics office Insee said.
Stronger growth may help French President Jacques Chirac and Finance Minister Nicolas Sarkozy, whose party lost European Parliament elections to the opposition Socialists on June 13, to rein in the budget deficit. France expects to breach the European Union's deficit limit of 3 percent of gross domestic product for the third year. It aims to comply with the rule next year.
"While we were very suspicious a few months ago about the possibility of the government reaching its target in terms of the budget deficit, the chances are looking slightly better today," said Dominique Barbet, an economist at BNP Paribas in Paris. "We have pretty much reached a position of well-balanced and sustainable growth."
The European Central Bank expects the 12-nation euro region's economy to grow 1.7 percent this year after it expanded 0.6 percent in the first quarter, the fastest in three years. The ECB is concerned that rising oil prices may lead to higher wage demands, fueling inflation.
Export Demand
France, Europe's third-biggest economy is recovering from its slowest growth in a decade last year as faster global growth raises demand for exports such as aircraft made by Airbus SAS. Exports will probably compensate for a slowdown in consumer spending, which Insee predicts will grow only 0.3 percent in the second quarter.
France and Germany last year convinced EU governments to ignore the budget rules and help them fend off demands for spending cuts from the European Commission. France's deficit swelled to 4.1 percent of GDP last year, the highest among euro countries.
Sarkozy said in a debate on the budget in the French Parliament faster growth may not be enough for France to meet the 3 percent rule. "We have to realize that with growth of more than 2 percent this year, and 2.5 percent next year, our public deficit would remain above 3 percent if we don't act," he said.
Outpacing Neighbors
The French statistics office predicted the economy will grow 0.5 percent in the second quarter after growing the fastest pace in two years in the first quarter, expanding 0.8 percent and outpacing neighbors such as Italy, which grew 0.4 percent.
Italian manufacturers' confidence fell in June for a second month because of slumping consumer demand, according to a report based on a survey of 4,000 executives and published today by the Rome-based Isae institute.
France's Insee forecast that unemployment will hold at about 9.8 percent until the end of the year and inflation will slow in the second half as pressures from rising oil prices dissipate.
Insee's Bonnet said if oil prices were to stay around $40 a barrel until the end of 2004, it would cut 0.1 percentage point from economic growth in France and the euro region. The price of Brent crude oil futures on London's International Petroleum Exchange, the benchmark for Europe, has declined 8 percent since peaking in mid-May at $38.78.
Oil Risk
"The recovery is robust enough to last, though not to accelerate," said Michel Devilliers, Insee's chief forecaster, at a press conference in Paris. "The main threat to growth at the moment is from oil prices."
France's annual inflation rate, which climbed to a 12-year high of 2.8 percent in May, will probably fall below 2 percent by the end of the year, the statistics office forecast.
An agreement brokered by Sarkozy between the large supermarket chains and their suppliers to lower prices on certain brands of goods by 2 percent from September, will lower the annual inflation index by 0.2 percentage points at most, Insee said.
For the third and fourth quarters, Insee predicts growth of 0.6 percent and 0.5 percent respectively.
Powering the pickup in growth is a rise in exports, which will grow 3.6 percent this year after contracting by 2.7 percent in 2003, Insee predicted. Still, a 5.1 percent increase in imports this year will mean net trade trims 0.4 percentage points from GDP, Insee said.
By: N. Peter Kramer
