French consumer spending takes a dip 23/04/2008 00:00

The cutting back on spending behaviour could spell danger for the economy

23 April 2008

PARIS - French consumers took fright at inflation in March, cutting back on spending in an ominous signal that overall economic momentum could now be seriously at risk.

Household spending on manufactured goods, a key driver of the French economy, fell 1.7 percent in March after a gain of 1.3 percent in February, the national statistics institute INSEE reported on Wednesday.

Analysts said the decline could herald a shift in behaviour, with French consumers saving more and spending less, except on necessities such as food and fuel for which prices are rising.

"This is the first serious warning on the French economic climate since the start of the year," said analyst Nicolas Bouzo of the Asteres research group.

"It seems clear that in a context in which rising inflation has brought the consumer confidence index to an all-time low, the French are changing their ways.

"They're boosting their precautionary savings and getting out of debt. In other words the drop in consumer spending in March reflects a change in behaviour on the part of households that should last for several months."

Bouzou pointed to a sharp decrease - 7.9 percent - in spending on textile and leather goods.

"Households, weighed down by increasing food and energy expenses, are reducing their purchases in other sectors, such as clothing."

For Mathilde Lemoine of the HSBC bank, "the jump in food prices is beginning to take its toll on the French consumer and that is what is worrying."

At the bank BNP Paribas economist Mathieu Kaiser noted that spending on durable goods, such as appliances, electronic equipment and home furnishings, declined by 1.1 percent in March after a 3.3-percent rise in February.

"With a continued softening in the housing market and deteriorating purchasing power, sales of durable goods should continue to fall in the coming months."

Alexander Law of the market analysis unit Xerfi said the French economy "had entered the eye of the cyclone."

He said: "The household spending motor is seriously affected and is not likely to recover before the start of the second half - at best.

"Under these conditions it is useless to hope for an increase in gross domestic product this year of more than 1.5 percent, knowing that spending for the last 10 years has accounted for between 60 and 100 percent of growth."

The French economy, after growing 1.9 percent in 2007, is expected to expand slightly less than 2 percent this year, according to the government's forecast.

French consumer spending rose 0.6 percent for the first quarter, rebounding after a fall of 0.1 percent in the final three months of 2007.

While the first quarter performance is a "good sign," said Jean-Christophe Caffet of brokers Natixis, "as long as prices continue to rise, we have to expect that consumption will decline."

He added that weaker spending in the auto and durable goods sectors "reflects tighter credit conditions and a levelling off in the housing market".

[AFP / Expatica]

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