French shoppers surprisingly upbeat, businesses fret

By Tamora Vidaillet

PARIS (Reuters) - French shoppers defied expectations in September by spending more than they did the previous month, but business morale plumbed a 15-year low, clouding the outlook for the euro zone's second-biggest economy.

Household spending on manufactured goods including cars and clothes rose 0.6 percent in September, its biggest monthly gain since May, and well above the 0.1 percent fall expected by economists polled by Reuters.

It was a sizeable rebound from August, when consumer spending declined by a revised 0.2 percent, suggesting French consumers had shrugged off dramatic headlines about the worst global market crisis since the Great Depression of the 1930s.

However, employers appeared much more apprehensive.

Business confidence figures for October, also released by national statistics office INSEE on Thursday, fell to their lowest level since December 1993, declining to 88 from a revised 91 the previous month.

Economists expected that consumers would pare back their purchases as the reality of the economic slowdown hit home.

"We expect to see a significant rise in unemployment in the euro zone and France, so I would expect that over time ... we should see further pressure on spending," said Matthew Sharratt, European economist with Bank of America in London.

Household consumption accounts for more than 50 percent of gross domestic product in France. However, the INSEE consumer spending data released on Thursday only covers manufactured goods and accounts for just a quarter of total consumption.

Spending on cars in September rose 0.7 percent compared with a one percent fall the previous month while that of textiles and leather goods, a traditionally volatile component comprising clothes, jumped 2.8 percent, helping to drive overall gains

Over the third quarter, consumer spending grew by 0.7 percent due in part to greater spending on clothes after a flat reading between April-June, INSEE said.

RECESSION WATCH

The economy contracted 0.3 percent in the second quarter of 2008 and many analysts expect a further slippage in the third quarter, pushing France into a recession, which is technically defined as two consecutive quarters of contraction.

"The debate is no longer about whether France is in recession or not," said Jean-Louis Mourier, an economist with Aurel Leven in Paris. "The climate is atrocious and that tells you more about the real state of the economy."

The INSEE business survey showed a slump in the production outlook of French business chiefs this month, with that index down at -66 from -42 in September. The overall orders and demand index fell to -30 from -25.

"(This) really suggests that the manufacturing sector in France is in a lot of trouble looking ahead," said Sharratt.