French Business Confidence Falls to Lowest Since 2005

By Sandrine Rastello

July 24 (Bloomberg) -- French business confidence fell to the lowest in more than three years in July as record oil prices and a stronger euro dimmed the outlook for economic growth.

An index of sentiment among 4,000 manufacturers dropped to 98 from 101 in June, according to Insee, the Paris-based national statistics office. That was the weakest since May 2005. Economists expected a reading of 100, according to the median of 22 estimates in a Bloomberg News survey.

Growth in the French economy is deteriorating as inflation and oil above $120 a barrel squeeze purchasing power and push up production costs just as the stronger euro hurts exports. The jump in consumer prices prompted the European Central Bank to raise interest rates earlier this month and President Jean-Claude Trichet is refusing to abandon his inflation-fighting rhetoric.

``This is a surprise in terms of scope, not of trend,'' said Eric Vergnaud, an economist with BNP Paribas SA in Paris, in an interview on Bloomberg Television. ``It reflects the slowdown France in undergoing; we expected a very low growth rate in the second quarter.''

Insee's sub-index of how executives see the outlook fell to minus 34 from minus 15; a gauge of orders dropped to minus 18 from minus 13; and a measure of foreign orders slipped to minus 14 from minus 7.

Renault Revamp

Renault SA, France's second-largest carmaker, today said it will cut production costs and jobs to meet its profit-margin goal for next year.

Adding to signs of a slowdown, France's manufacturing and services industries shrank in July. Royal Bank of Scotland Group Plc said today that its composite index for France dropped to 47, the lowest level in 80 months.

Europe's largest economies have shown signs of slowing since the end of the first quarter. Business confidence fell to the lowest level in almost three years in Germany, the Munich-based Ifo Institute said today. In Italy, it slipped to the weakest since October 2001, the Isae Institute said.

Bonds rose after the report, with the yield on the 4 percent bond due April 2018 falling 7 basis points to 4.75 percent. The euro declined 0.3 percent to $1.5650 at 10:39 a.m. in Paris.

Slippery Slope?

Trichet said last week there will be a ``trough'' in growth through the third quarter before the economy gathers strength toward the end of the year. The bank raised its benchmark rate by 25 basis points to 4.25 percent this month.

For companies such as Airbus, the world's biggest planemaker, the euro's 14 percent appreciation against the dollar over the past year is a ``deep, substantial problem,'' Chief Executive Officer Tom Enders said yesterday. The euro climbed to a record $1.6038 on July 15.

``We are preparing ourselves for a sustained period of a low dollar,'' Enders told reporters in Toulouse, France. With record oil prices also hurting the industry, Airbus faces a ``challenging environment,'' he said. Crude oil has risen 70 percent in the past year, reaching a record $147.27 a barrel on July 11.

French Finance Minister Christine Lagarde last week said growth this year would be at the lower end of the government's forecast of between 1.7 percent to 2 percent.

To contact the reporter for this story: Sandrine Rastello in Paris at srastello@bloomberg.net