Paris, May 20 (Bloomberg) -- France's economy grew in the first three months of the year, after shrinking in the previous quarter, as tax cuts spurred consumer spending and companies boosted investment. Gross domestic product rose 0.3 percent, compared with a contraction of 0.1 percent in the previous quarter, the government statistics office said. France accounts for about 21 percent of the economy of the dozen nations sharing the euro. France grew in the quarter while the rest of Europe moved closer to recession after Germany, Italy and the Netherlands contracted. Prime Minister Jean-Pierre Raffarin ignored European Union budget rules and cut taxes, encouraging consumer spending. Exports tumbled as the increase in the euro made French products more expensive to customers overseas.
``It's unsustainable for consumer spending to keep rising at the rate it did in the first quarter,'' said Guillaume Rabault, chief economist at HSBC Asset Management Europe SA, which oversees about 27 billion euros ($31.4 billion) in funds. Consumer spending gained 0.6 percent in the quarter, the biggest advance in more than a year, after a revised increase of 0.4 percent in October through December. The total investment rose 0.4 percent after a 1.1 percent decline in the previous three months. Corporate investment grew 0.5 percent in the quarter, the first rise since the first three months of 2001.
Skirting Recession
The jump in consumer spending helped France avoid a recession, or two quarters of contraction. The European Commission predicts the economies of the dozen countries sharing the euro may fail to expand for the next two quarters after stagnating in the first three months. ``We're going to have to wait until the beginning of September before we know if there's going to be an improvement in the economy,'' said Guy Dolle, managing director of Arcelor SA, the world's largest steelmaker, in an interview Thursday. The euro climbed yesterday to its highest against the dollar since the common currency's inception in 1999. Exporters across Europe, like drugmaker Aventis SA, carmaker Fiat SpA and specialty chemicals maker Degussa AG, are reporting weaker sales because of the euro's 27 percent rise in the past year. ``This increase makes business for European companies very, very difficult,'' said Schneider Electric SA's Chairman and Chief Executive Officer Henri Lachman told shareholders at an annual meeting of shareholders Friday.
Exports Drop
The world's largest maker of circuit breakers is firing workers and moving factories to cut costs and boost operating profit to 14 percent of sales. The euro's rise hurt exports, causing them to fall 0.7 percent in the quarter, the report said. It also lowered the cost of imports, which increased 0.7 percent from the final three months of last year. Net trade lopped 0.4 percentage point from French growth during the quarter. Bank of France leading indicators suggest the French economy will grow 0.2 percent in the second quarter. The economy grew 1.2 percent last year, its slowest in six years, as companies cut costs, trimmed investment and fired workers. France's jobless rate climbed to a 31-month high of 9.3 percent in March, weighing on consumer confidence. French Finance Minister Francis Mer said in a radio interview yesterday that ``everything is in favor of easing'' interest rates in the 12-country euro region, echoing comments form his German and Italian counterparts.
Interest Rates
Earlier this month the ECB left its benchmark interest rate unchanged at 2.5 percent and central bank officials have suggested inflation is becoming less of a concern as the euro's gains damp price increases. A further reduction would take borrowing costs to the lowest since at least 1948 for any country in the 12-nation euro region. Increasingly, investors expect ECB policy makers to lower rates on June 5, interest rate futures indicate. The yield on a three-month Euribor contract maturing in June was 2.225 percent at 9:10 a.m., compared with 2.35 percent a week ago. The money market rate is at 2.38 percent. A basis point is 0.01 percentage points. The euro was recently trading at $1.1640, or 0.3 percent lower, as investors speculated on the likelihood of an ECB interest rate reduction. French stocks extended their losses for a second day. The benchmark index, the CAC 40, was 0.3 percent lower at 9:12 a.m. at 2857.92. Yesterday it shed 4.3 percent.
France's government has defied European Union calls to reduce its deficit by cutting spending and ending planned tax cuts, measures Mer says will only lead the country into a recession. ``Tax rates must keep coming lower,'' Mer said yesterday in the interview on France Inter. ``It's the only way we can create the conditions through which we will build growth.'' France is lowering income tax, giving tax credits to low- income earners and cutting payroll and local government taxes paid by companies in a net 3.2 billion-euro tax cut package this year to bolster growth.//www.bloomberg.com