FRENCH LACK CONFIDENCE BUT HAVE THE WILL TO SPEND.

French consumer confidence remains depressed, yet during the first half of the year consumer spending has surpassed projections of economists and government officials. This shows that the link between confidence and spending tends to be loose in European nations where the average household enjoys a large margin for discretionary spending.

This year, households have shown a willingness to borrow more in order to acquire high-end durables and fixed assets. Early in the second quarter of this year, fixed asset investment on the part of households was up 1.3 percent year-on-year. As the second quarter progressed, new car sales gained momentum, with year-on-year growth approaching 5 percent in May.

Although consumer spending surprised on the high side earlier this year, lingering job-related concerns could slow the upward momentum toward the end of 2004. Unemployment is stubbornly holding at about 10 percent and that is too high for comfort. The relatively unfriendly labor climate and 35-hour work week have undermined productivity and led to an exodus of jobs to where labor costs are lower. Painful labor reforms are still needed before job-related concerns will subside.

In the remaining months of this year, consumer goods sales will primarily be driven by low- to mid-priced products including apparel, footwear, and household electronics products. Other product categories that should experience healthy sales gains late this year include information technology and telecommunications equipment.

Over the past two years, French consumers have come to accept online shopping as a viable alternative to traditional retail establishments. According to Data released by the Association for Online Commerce and Services, the value of sales at France's 20 leading Internet retailers was up 62 percent year-on-year by the second quarter of 2004. France now leads the eurozone in online commerce and is closing in on the UK, which leads all European nations.

Product categories that are showing the strongest growth in online sales include clothing, cosmetics, and household electronics items. The national rail system is experiencing strong online ticket sales gains this year. Travel sites are particularly popular and a growing number of French travelers are booking their flights and hotel rooms online. Up until this year, French online consumers were mainly teens and young adults. However, there is increasing evidence that the online consumer base is in transition, with dynamic sales growth among women and people over the age of 50. This trend is reflected in the widening array of products offered for mature consumers.

The upward momentum in e-commerce is linked to rising Internet use in France. Data released by the research firm Mediametrie reveals that over 23 million French men, women, and children have access to the Internet and 11.2 million French homes have a personal computer.

In anticipation of increased demand for French goods and services both at home and abroad, companies are boosting capital expenditure. Orders for production equipment should show year-on-year growth in excess of 5 percent during the fourth quarter of this year and first half of 2005. Most French manufacturers are operating at well under installed capacity, so plant expansion plans are likely to remain on hold until late 2005 or into 2006.

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