Economy struggles to switch into investment drive

14th May 2007, Comments 0 comments

PARIS, May 14, 2007 (AFP) - Corporate investment in France, which economists say will do more to spark a recovery in the listless French economy than consumption, should rebound this year after stagnating in 2006, a survey showed on Monday.

PARIS, May 14, 2007 (AFP) - Corporate investment in France, which economists say will do more to spark a recovery in the listless French economy than consumption, should rebound this year after stagnating in 2006, a survey showed on Monday.

But analysts reacted cautiously to the report, noting that previous such predictions had failed to bear fruit.

The national statistics institute INSEE, citing a quarterly survey of business leaders, said in the manufacturing sector alone investment was likely to expand 5.0 to 7.0 percent.

"A decline in investment in the automobile industry was offset by an increase in the capital goods sector," INSEE reported.

Investment in capital goods production is forecast to rise 15 percent this year, up from 11 percent predicted in the agency's January survey. The auto sector, by contrast, was likely to experience a 7.0-percent fall in investment, compared with a 5.0 percent decline projected in January.  

Newly elected French leader Nicolas Sarkozy, who will assume the presidency on Wednesday, campaigned on a platform of market-orientated reforms to booste French industry through tax incentives, deregulation and an increase in consumer purchasing power.

But analyst Nicolas Bouzou of the research group Asteres argued that  investment rather than consumption drive economic momentum in the long term.

"Consumption can provide a temporary spike to growth but investment keeps it going over the long term. It's something the Germans understand very well and new team in France would do well to keep it in mind."

Marc Touati, an economist with the consulting group ACDE, said the latest INSEE poll should be treated "with caution."

He said: "For the last five years French business leaders questioned by INSEE have said in April they expected increased annual invesment, with the final result being either stagnation or a decline."

Touati also noted that only 17 percent of business investment announced for this year is earmarked for increased capacity, the type of expenditure that has the potential to create jobs.

Half of the planned investment is for renovation or rationalisation, "investment that in the best case either keeps employment stable, or eliminates positions."

At the market research firm Xerfi analyst Alexander Law described the latest INSEE survey as "reassuring," holding out the possibility that manufacturing investment would increase in 2007 for the first time in six years.

But looming over the optimistic forecasts is the sputtering US economy, its momentum hobbled by a deteriorating housing market, Law said.

"However dynamic emerging market countries might be, it is the United States that has determined the pace of global growth over the last few years," he said.

In addition an appreciating euro could pose a problem for certain companies, making their goods more expensive and less competitive on world markets.

But Law added that for the moment French businesses have managed to cope with the effects of a rising currency.


Copyright AFP

Subject: French news

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