French consumer spending rises

Consumer spending, the motor of the French economy, inched higher in May largely thanks to a reduction in the savings rate as rising taxes and stagnant economic growth squeezed households, data showed today.

Consumer spending grew 0.4 per cent last month, topping economists' forecasts of zero growth but down from a 0.7 per cent rise in April, INSEE national statistics agency data showed.

The euro zone's second largest economy posted zero growth in the first quarter as businesses slashed investment to weather the euro zone crisis and exports slowed, INSEE said, confirming an estimate published last month.

In another worrying sign, gross public debt hit an all-time high of 89.3 per cent of gross domestic product (GDP) in the first quarter, flirting with a 90 per cent threshold over which economists say growth begins to suffer.

Many private economists forecast second quarter GDP will be flat or slightly lower, with only a shallow rebound in the second half of the year.

"Households are paying more and more taxes and have to reduce their savings to maintain consumption at a reasonable rate," BNP Paribas economist Dominique Barbet said.

With taxes and prices rising faster than wages, INSEE said households' purchasing power contracted by 0.2 per cent in the first quarter, following a 0.3 per cent fall in the fourth quarter.

The household savings rate, meanwhile, fell to 15.9 per cent in the first three months of the year from 16.2 per cent in the final quarter of 2011, when savers squirreled away spare cash at the fastest rate in 30 years amid concerns about Europe's debt crisis.

Tax pressure is only likely to grow with the new Socialist government planning to unveil a host of tax hikes on Wednesday, despite president Francois Hollande pledges to target the rich and big companies in order not to sap consumer spending.

"Fiscal consolidation will weigh on household budgets, as on average they will face higher taxes and lower transfers from the government," Barclays economist Marion Laboure said.

Amid signs of a broad economic downturn in many countries in Europe, Mr Hollande has pushed for a package of measures to stimulate flagging growth, which was discussed by EU leaders at a summit in Brussels today.

At home, Mr Hollande's six-week-old government needs to raise extra revenues and freeze some spending in order to make up a shortfall of €7-10 billion in the 2012 budget.

The gap must be closed if it is to meet a pledge to cut the deficit to 4.5 per cent of GDP this year from 5.2 per cent in 2011.The government needs to respect its deficit targets if France is to retain financial markets' favour, which allows Paris to finance its record debt at historically low levels.

Reuters