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European Economies: French Confidence Drops to 19-Month Low

European Economies: French Confidence Drops to 19-Month Low

May 27 (Bloomberg) -- Manufacturers' confidence in France, Europe's third-largest economy, unexpectedly fell to a 19-month low in May as companies including PSA Peugeot Citroen grappled with higher raw-material costs and a worsening economic outlook.

An index measuring sentiment among 2,000 manufacturers fell to 96 from 97 in April, statistics office Insee said in Paris today. Economists expected an increase to 98, according to the median estimate of 26 in a Bloomberg survey.

Economic growth in France slowed more than economists expected in the first quarter. Prospects of a weakening economy and rising unemployment have contributed to a decline in support for President Jacques Chirac and mounting opposition to the European Union constitution before a referendum May 29.

``It's clearly disappointing and echoes what we've seen in other European countries,'' said Jean-Francois Mercier, an economist at Citigroup Inc. in London. ``There's no sign of a turnaround. Bad news from one of the major euro zone countries is bad news for the others.''

Countries across Europe are lowering their growth forecasts for this year. Finland's Finance Ministry today cut its estimate to 3 percent from 3.3 percent. The Dutch central bank said yesterday its prediction will have to be revised down ``considerably'' and the Belgian government's forecasting agency lowered its estimate to 1.7 percent from 2.2 percent.

Euro Decline

In Switzerland, which isn't a member of the euro region, Economics Minister Joseph Deiss said in an interview yesterday the economy may grow at a slower pace than the government's prediction of 1.5 percent. Europe buys about 60 percent of Swiss exports.

The euro was little changed near a seven-month low against the dollar, heading for its fifth losing week. The European currency rose 0.2 percent to $1.2534 at 12:03 p.m. in Paris after falling as low as $1.2495 yesterday, the weakest since Oct. 19. European stocks fell, with the Dow Jones Stoxx 50 Index down 0.2 percent at 2922.20 at 12:03 p.m.

Business confidence in Germany and Italy, the biggest and third-biggest economies in the 12-nation euro region, also fell this month. German consumer confidence dropped for a second month as expectations for growth and personal income deteriorated. The Nuremberg-based GfK market research institute's index of consumer sentiment, published today, fell to 4.4 points from 4.8.

By contrast, U.S. consumer spending probably rose in April at the fastest pace of the year, a government report is expected to show today, according to the median of 66 estimates in a Bloomberg survey. Japanese retail sales rose faster than economists expected in April, the Ministry of Economy, Trade and Industry said today.

Forecast Cut

Signs of a deepening slowdown in Europe and rising energy costs prompted the Organization for Economic Cooperation and Development on May 24 to cut growth estimates for its 30 members this year and next to 2.6 percent and 2.8 percent.

The Paris-based OECD also lowered its forecast for France to 1.4 percent from the 2 percent it predicted in November and pared its estimate for the euro region to 1.2 percent from 1.9 percent.

Peugeot Citroen, Europe's second-largest automaker, on May 25 repeated that 2005 profit may decline because of higher steel aned rubber costs and increasing marketing expenses. The Paris-based company expects the Western European car market to be flat this year, Chief Executive Officer Jean-Martin Folz said.

``We're in a European market that remains difficult,'' Folz said at the company's annual meeting. ``We are in an extremely competitive environment.''

Rising Costs

A gauge measuring the outlook for production dropped to minus 25 from minus 18 in April, today's release showed. Manufacturers also grew more concerned about new orders, with a sub-index falling to minus 24 from minus 21. Expectations for the further price development fell to minus 3 from minus 5.

``Today's report means that we're not yet in recession in manufacturing, but it's not very far off,'' said Marc Touati, chief economist at Natexis Banques Populaires SA in Paris. ``For the second quarter, we'll have a stagnation in production.''

The price of a barrel of Brent crude oil is 35 percent higher than a year ago, clouding growth prospects by crimping companies' profit margins and leaving consumers with less money to spend. Crude traded above $50 in London yesterday.

French unemployment, at a five-year high of 10.2 percent in March, may fall ``somewhat,'' while remaining above 9 percent through 2006, the OECD forecast.

``If employment doesn't pick up at least at a fast pace, it will be bad for domestic spending,'' said Laurence Boone, a Paris- based economist at Barclays Capital.

`Very Close Call'

Surveys since May 10 by France's six leading polling companies show the ``no'' vote to the EU constitution in the lead. A defeat in France would kill the treaty, which requires unanimous EU support, and make it more difficult for Chirac to defend his post in 2007 elections.

``It's going to be a very close call on Sunday, all signs are pointing towards a rejection of the constitution,'' Barclays' Boone said. ``At the same time, there is still a high proportion of undecided people, which can still turn the vote.''

To help revive growth and bolster confidence across the region, the OECD recommended the European Central Bank cut its benchmark interest rate from 2 percent. The Frankfurt-based bank has kept rates on hold since June 2003, and ECB President Jean- Claude Trichet has ruled out a rate cut to revive the economy.

Investors expect the ECB to keep rates unchanged for the rest of the year, futures trading suggests. The implied rate on the December Euribor interest-rate futures contract fell to a low of 2.13 today, down from 2.20 percent at the beginning of this month.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.13 percent.

To contact the reporter on this story:
Simone Meier in Paris at [e-mail]


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