France's economy will probably grow 2.3 per cent this year, the fastest pace since 2000, as demand from China and the US spurs exports and encourages investment, the Paris-based national statistics office Insee said.

Stronger growth may help French President Jacques Chirac and Finance Minister Nicolas Sarkozy, whose party lost European Parliament elections to the opposition Socialists on June 13, to rein in the budget deficit. France expects to breach the European Union's deficit limit of 3 per cent of gross domestic product for the third year. It aims to comply with the rule next year.

"While we were very suspicious a few months ago about the possibility of the government reaching its target in terms of the budget deficit, the chances are looking slightly better today," said Dominique Barbet, an economist at BNP Paribas in Paris. "We have pretty much reached a position of well-balanced and sustainable growth."

The European Central Bank expects the 12-nation euro region's economy to grow 1.7 per cent this year after it expanded 0.6 per cent in the first quarter, the fastest in three years. The ECB is concerned that rising oil prices may lead to higher wage demands, fuelling inflation.

The bank may raise its benchmark interest rate by as much as a quarter point from 2 per cent in the third quarter, Insee economist Xavier Bonnet said, following a probable increase on Wednesday in the US Federal Reserve's federal funds target rate.

Fed policy makers will raise the bank's benchmark rate by 25 basis points to 1.25 per cent at a meeting next week, according to 130 economists surveyed by Bloomberg News.

Export demand

France, Europe's third-biggest economy, is recovering from its slowest growth in a decade last year as faster global growth raises demand for exports such as aircraft made by Airbus SAS. Exports will probably compensate for a slowdown in consumer spending, which Insee predicts will grow only 0.3 per cent in the second quarter.

France and Germany last year convinced EU governments to ignore the budget rules and help them fend off demands for spending cuts from the European Commission. France's deficit swelled to 4.1 per cent of GDP last year, the highest among euro countries.

Sarkozy said yesterday in a debate on the budget in the French Parliament faster growth may not be enough for France to meet the 3 per cent rule. "We have to realize that with growth of more than 2 per cent this year, and 2.5 per cent next year, our public deficit would remain above 3 per cent if we don't act," he said.

Outpacing neighbours

The French statistics office predicted the economy will grow 0.5 per cent in the second quarter after growing the fastest pace in two years in the first quarter, expanding 0.8 per cent and outpacing neighbours such as Italy, which grew 0.4 per cent.

Italian manufacturers' confidence fell in June for a second month because of slumping consumer demand, according to a report based on a survey of 4,000 executives and published yesterday by the Rome-based Isae institute.

France's Insee forecast that unemployment will hold at about 9.8 per cent until the end of the year and inflation will slow in the second half as pressures from rising oil prices dissipate.

Insee's Bonnet said if oil prices were to stay around US$40 a barrel until the end of 2004, it would cut 0.1 of a percentage point from economic growth in France and the euro region. The price of Brent crude oil futures on London's International Petroleum Exchange, the benchmark for Europe, has declined 8 per cent since peaking in mid-May at US$38.78.

Oil risk

"The recovery is robust enough to last, though not to accelerate," said Michel Devilliers, Insee's chief forecaster. "The main threat to growth at the moment is from oil prices."

France's annual inflation rate, which climbed to a 12-year high of 2.8 per cent in May, will probably fall below 2 per cent by the end of the year, the statistics office forecast.

An agreement brokered by Sarkozy between the large supermarket chains and their suppliers to lower prices on certain brands of goods by 2 per cent from September, will lower the annual inflation index by 0.2 of a percentage points at most, Insee said.

For the third and fourth quarters, Insee predicts growth of 0.6 per cent and 0.5 per cent respectively.

(China Daily 06/25/2004 page12)