French business under no illusions about challenges in home market

Mon Mar 10, 2014 2:31pm EDT

* French economy remains anaemic, say CEOs

* Consumer spending shrank in January

* Retailers forecast slight growth at best

* Public projects key for weak building sector

By Natalie Huet

PARIS, March 10 (Reuters) - French companies see little hope for domestic growth this year and are stepping up efforts to cut costs and fine-tune product lines to contend with stubbornly tough market conditions.

While the economies of Germany, Britain and even Ireland have made significant progress, France has produced a mixed bag of macroeconomic data and was warned by the EU last week that it is lagging behind euro zone peers and not doing enough to cut labour costs, trim public spending and boost competitiveness.

Unveiling 2013 results over the past month, the bosses of some of France's top companies had a common message on the euro zone's second-biggest economy: they don't expect the country to be worse off in 2014, but neither are they counting on any clear improvement.

Key industrial sectors are at 20-year lows and unemployment is stuck above 10 percent, crimping the household consumption that has been a traditional driver of growth. Construction companies fear that state spending - the one factor supporting domestic business - will be a casualty of government efforts to reduce the public deficit.

There was more downbeat news on Monday when the French central bank forecast that the economy will grow by 0.2 percent in the first quarter, down from 0.3 percent growth in the fourth quarter of 2013. Separate data showed industrial output fell 0.2 percent in January, against analysts' expectations of a rise.

January consumer spending also shrank unexpectedly, with falling car sales weighing particularly heavily. The 2 percent decline in spending represented the biggest drop in two years.

"We just have to get used to this environment and not hope for a way out of this crisis that may not happen," Xavier de Mezerac, finance chief of supermarket chain Auchan, said on Monday as he forecast anaemic domestic demand this year.

Like many rivals, France's fifth-largest food retailer has been cutting prices and has even put smaller, cheaper goods on its shelves at the end of each month to appeal to workers anxiously awaiting their pay cheques.

Carmakers Renault and PSA Peugeot Citroen have already cut staff and wages to adjust capacity to a demand slump that sent output to a 20-year low in 2013, though Renault has enjoyed notable export success with its low-cost Dacia brand.

FEWER "GRANDS PROJETS"

The shrinking construction sector, meanwhile, is facing a predicted 10-12 percent slide in sales of new homes this year, with Standard & Poor's forecasting a 3 percent drop in house prices after a 2 percent dip in 2013.

Builders Bouygues, Vinci and Eiffage have all been pinning their hopes on orders abroad while focusing on higher-margin projects at home. Bouygues, for example, is revamping the Ritz Hotel in Paris.

Vinci and Eiffage acknowledged that a large chunk of their domestic revenue came from public projects, notably a high-speed railway linking the central city of Tour to Bordeaux on the west coast.

Eiffage said that small-to-mid-scale projects such as construction or repairs to hospitals and universities remain its bread and butter, but Vinci warned that public orders could dry up as President Francois Hollande's government seeks 50 billion euros ($69.31 billion) in budget savings from 2015 to 2017 to bring public finances into line with EU targets.

"Will there be large projects in France in the next few months or years? The answer is probably not very many, at least with the French government as the final client," Vinci Chief Executive Xavier Huillard told analysts.

One important exception is a pending 3.6 billion euro public-private deal to improve the country's motorway network, involving Vinci, Eiffage and Abertis unit Sanef. But for the time being, local elections this month could prompt mayors to put projects on hold, especially road-building plans.

It should come as no surprise, therefore, that French stocks dumped by investors during the economic crisis have failed to match the recovery of Germany's DAX index.

Yet the recent sell-off in emerging markets has provided a silver lining for those stocks with most exposure to the French market. Shares in companies from carmakers and builders to telecoms group Orange have achieved gains of 16-24 percent since the start of the year.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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