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French Manufacturers' Confidence Unexpectedly Drops

26/06/2003 13:19
French manufacturers' confidence this month unexpectedly dropped to the lowest level since November 2001, increasing the chances that Europe's third-largest economy failed to grow in the second quarter.

An index based on a government survey of about 2,000 companies dropped to a reading of 90 from a revised 92 in May, national statistics office Insee said in Paris. Economists had expected an increase in the index to 94.

The drop in French business confidence, amplified by strikes against planned changes in the pension system, contrasts with increased optimism among companies in Germany and Italy. Consumer spending, which helped Europe's third-largest economy expand in the first quarter, slumped the most in almost four years in May.

``Both internal and external demand remain weak, which suggests that company spending should also remain weak for some time,'' said Laure Maillard, an economist at CDC Ixis in Paris, who estimates a contraction of gross domestic product in the second quarter is increasingly likely.

France's economy expanded 0.3 percent in the first three months, while the economies of Germany and Italy shrank. Together, the three countries account for two-thirds of the $8 trillion economy of the dozen nations that share the euro.

Orders Drop

Today's report shows that an index measuring order books slumped to the lowest level since March 1996, while executives' outlook for their own production fell to the lowest since November 2001 -- two months after the worst terrorist attacks in U.S. history on Sept. 11 that year.

Sales at Renault SA, France's second-biggest carmaker, slumped 16 percent last month from May 2002. Software developer Cerep SA trimmed its forecasts for sales and earnings this week, citing sputtering economic growth.

``I don't see any recovery in my order books,'' said Jerome Lecat, chief executive officer of closely held internet security company Zencod. ``It's become no easier to get contracts.''

Also weighing on business confidence were repeated strikes in past weeks by public sector workers opposed to government plans to overhaul the pension system. Prime Minister Jean-Pierre Raffarin wants to increase the number of years civil servants contribute to the mandatory state pension fund by 2 1/2 years, to bring them into line with private sector employees.

``French manufacturers are concerned that France isn't capable of reforming,'' said Marc Touati, an economist at Natexis Banques Populaires SA in Paris. ``The strikes in May and June that almost ground the economy to a halt were also a reason for low morale.''

Rate Reductions

Business confidence also fell in Belgium and the Netherlands this month, backing up a forecast by the European Union that the euro region's economy stagnated for a second quarter. Increased optimism among German and Italian executives in June isn't enough to signal a rebound in growth, economists said.

``The business surveys released in the three big euro zone countries this week point to a mediocre outlook,'' said Stephane Deo, an economist at UBS Warburg France in Paris.

Executives across Europe welcomed the reduction in interest rates by the European Central Bank on June 5. The cut, which left the bank's benchmark refinancing rate at 2 percent -- the lowest level in more than half a century -- makes it cheaper for companies to borrow money and invest.

Rates in Europe remain higher than those in the U.S. To help spur an economic recovery, the U.S. Federal Reserve lowered interest rates by a quarter point yesterday, bringing the overnight lending rate to a 45-year low of 1 percent.

`End of Tunnel'

Signs that the U.S. economy is gaining strength have helped arrest the euro's climb against the dollar, bringing relief to exporters whose wares were made more expensive in the U.S. by the currency's increase. Europe's single currency surged 15 percent against the dollar in the first five months of this year. Since then, the euro has dropped 2 percent.

The euro fell again today, pushing the dollar to a five-week high. The common currency was 0.5 percent lower and bought $1.1474 at 11:03 a.m. in Paris.

Liquor maker Remy Cointreau SA's fiscal second-half profit rose 5 percent, helped by U.S. demand for Remy Martin and other cognacs. LVMH Moet Hennessy Louis Vuitton SA, the world's largest luxury goods maker, sees signs of a U.S. economic recovery that will boost the dollar and lead to an increase in business.

``We can predict that luxury goods will reach the end of the tunnel within six months,'' LVMH's Chairman Bernard Arnault told daily newspaper Le Monde in an interview published June 23.

Even so, European economies depend far more on each other than on the U.S. More than half of European trade is conducted within the euro are and Germany is the biggest trading partner of most countries on the continent.

``Most signs still suggest that an upturn in Europe remains more wishful thinking than reality,'' said Erik Nickerson, a partner at Globaleqon LLC, a U.S. economic consulting firm.