French consumer spending hits high

French shoppers show no signs of cutting back spending

French consumer spending in January rose at its fastest rate for 18 months, offering more evidence that economic slowdown in the US has yet to hit home in Europe.

INSEE, the national statistics institute, said January spending was up 3.2% month-on-month - three times what economists had forecast - and 5% year-on-year.

"This... gives a lie to the view that euroland growth is going to go the same way as the US," said Bear Stearns currency strategist Steve Barrow.

The apparent confidence of consumers in the eurozone's second largest economy makes it unlikely the European Central Bank (ECB) will see any immediate need to cut interest rates to encourage growth - a course of action already taken twice in the US and once in the UK this year.

Economists said the ECB was more likely to focus on controlling inflation, which, at 2.6% in December, remained above the bank's 2% target.

German confirmation

The need to concentrate on inflation was highlighted by data from two key German states on Thursday, showing unexpectedly strong rises in consumer prices this month.

In North Rhine-Westphalia - Germany's most populous state - February consumer prices rose by a seven-year high 2.7% year-on-year and 0.7% month-on-month.

In Hesse, February data showed inflation of 2.3% year-on-year and 0.6% month-on-month.

Economists said they were now revising upwards their forecasts for German February inflation to about 2.7% year-on-year.

Tax cut effect

Thursday's data, which followed evidence of strongly rising consumer prices in Italy, confounded expectations that eurozone growth and inflation would show increasing signs of easing in response to the weaker US economy.

A report earlier this week had also shown business confidence in Germany rising for the first time in eight months.

Most economists had predicted that the ECB would trim its benchmark rate, now at 4.75%, some time in the first half of the year.

Economists said the pick-up in French consumer spending appeared to show that tax cuts were having the desired effect.

Export drop off

They said the strength of spending was likely to outweigh any drop off in exports resulting from US weakness and keep gross domestic product (GDP) on an upward path in the first quarter of 2001.

"The outlook for French growth is really looking pretty favourable," BNP Paribas analyst Dominique Barbet said.

Economists are predicting data due out on Friday will show a 0.6% rise in French GDP for the last three months of 2000 - a similar level to that seen in the previous quarter.

The French government estimates growth in 2000 as a whole was slightly higher than 3%, a performance it expects to repeat in 2001.