French Industrial Confidence Slides,
Signaling Deeper Economic Slump
June 29, 2001
By David Woodruff and G. Thomas Sims
Staff Reporters of The Wall Street Journal
PARIS -- Evidence of a deepening economic
slump here continues to pile up, a development that
economists believe could give the European Central
Bank more ammunition for an interest-rate cut.
French industrial confidence skidded to a two-year
low in June, according to the national statistical
office Insee. Orders at industrial companies
declined for the sixth consecutive month,
according the office's monthly survey, and
inventories continued to swell.
The growing stream of negative signals led French
Finance Minister Laurent Fabius on Wednesday to
concede that growth this year would have trouble
reaching 2.5% -- well below the 3.3% budgeted by
the government. Insee and many private
economists have in recent weeks scaled down their
predictions to 2.3% annual growth, or below.
Broad Implications
"France was the euro area's hope," said Vincent
Koen, a senior economist at the Organization for
Economic Cooperation and Development in Paris.
"It is discouraging to see these numbers coming
out of France. This is a bit of a test for policy
makers."
Indeed, the negative news from France contributed
to renewed downward pressure on the euro. The
common currency fell to 84.39 U.S. cents in late
U.S. trading, down from 86.05 cents in New York
on Wednesday.
The weakness reflects investors' general belief that
-- in contrast to its European and Japanese
counterparts -- the U.S. Federal Reserve is
aggressively seeking to reignite growth through
interest-rate cuts.
The ECB this year has cut interest rates only once
by a quarter-percentage point, citing the euro
zone's stubbornly high inflation rate. But another
easing seems likely in the coming weeks, now that
bank officials stress dimming growth prospects
rather than risks of accelerating price increases.
Ernst Welteke, ECB council member and president
of the German central bank, on Thursday sounded
calmer with regard to inflation, though he wouldn't
jump to any conclusions. "The latest data from
Germany and some other European regions signal
easing price pressure," Mr. Welteke said. "But it's
too early to call the easing a turnaround."
Italy on Thursday reported inflation remained
unchanged in May at a 3% annual rate, according
to a preliminary reading. Economists had expected
a slight easing.
The ECB is coming under increased pressure from
politicians to take action as European companies
take a hit from the slowdown. Industrial production
is falling, prompting firms like Nokia Corp. and
Alcatel SA to announce layoffs and plant closings.
Think tanks are also urging the ECB to cut rates.
But inflation, which is at the highest level since the
advent of the euro in January 1999, has so far kept
the ECB from being more aggressive on lowering
rates.
The ECB council next meets on July 5, when most
economists expect the ECB to cut rates. The bank
last trimmed its key interest rate to 4.5% on May
10.
Consumer Calm
Until recently, France had resisted the effects of the
global economic slowdown far better than
neighboring Germany, which some economists say
is flirting with a recession. But the increasingly glum
outlook in the French manufacturing sector risks
spooking free-spending consumers, who until now
have kept the economy rolling.
News of layoffs has already dented consumer
confidence, causing families to save more and
spend less, say economists. Spending is still likely
to grow at a 2.8% annual pace this year, according
to Consensus Economics Inc. in London. But
economists say that won't be strong enough to
offset the sharp slowdown at manufacturing
companies.
"My forecast is not very upbeat," says
Jean-Francois Mercier, a London-based economist
at Solomon Smith Barney who recently cut his
prediction for overall economic growth in France
to 2.2% this year. "Compared with what people
were expecting at the beginning of the year, it is
quite a dramatic downward revision."
-- Michael R. Sesit contributed to this article.
Write to David Woodruff at
david.woodruff@wsj.com and G. Thomas Sims at
tom.sims@wsj.com |
