French Business Confidence Drops to 15-Year Low

By Sandrine Rastello

Oct. 23 (Bloomberg) -- French business confidence fell to the lowest in almost 15 years as the global credit crisis worsened, threatening to deepen a likely recession in the euro region's second-largest economy.

An index of sentiment among 4,000 manufacturers declined to 88 in October from 91 the previous month, according to Insee, the Paris-based national statistics office. The reading was the lowest since December 1993 and less than the median forecast of 89 in a forecast of 21 economists by Bloomberg News.

``There's not much to feed hope; there's no force globally, in Europe or in France that could significantly spur growth,'' said Jean-Christophe Caffet, an economist at Natixis in Paris. In France ``third-quarter growth was almost certainly negative.''

The 14-month old credit crunch is threatening to choke the expansion in the global economy, while Insee and the country's central bank say France slipped into recession in the third quarter. Finance Minister Christine Lagarde this week said the government will probably need to reduce its growth forecast for next year, from a current prediction of 1 percent.

Falling Prices

Insee's sub-index of how executives see the economic outlook declined to minus 66 from minus 42; a gauge of orders dropped to minus 30 from minus 25; a measure for executives' outlook for their own production fell from minus 11 to minus 19.

Bonds rose after the report, with the yield on the French 10-year 4 bond maturing in April 2018 slipping 1 basis point to 4.04 percent at 9:15 p.m. in Paris. The euro lost 0.3 percent to $1.2819.

The report also showed that manufacturers expect their prices to fall for a second month as crude oil and commodities costs retreat. Crude prices have shed more than 50 percent since a July 11 record of $147.27 a barrel, helping bring France's inflation rate to 3.3 percent in September from a 12-year high of 4 percent in July. Declining prices have cheered households.

Consumer spending on manufactured goods, which accounts for about 15 percent of the economy, unexpectedly rose 0.6 percent in September after a 0.2 percent decline in August, a separate Insee report showed. Economists expected a 0.2 percent drop, according to the median of 22 forecasts in a Bloomberg survey.

Recession

The increase in September left third-quarter spending up 0.7 percent after stagnating in April-June, Insee said. Sales of Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, posted a 13 percent gain in sales in the three months through September.

Even with the surprise increase in consumer spending, Insee still estimates the economy contracted 0.1 percent in the third quarter, meaning France entered its first recession in more than 15 years. The effect of the higher household spending on overall growth was ``limited'' because manufacturing hasn't recovered, Benoit Heitz, deputy chief forecaster at Insee, said in an interview.

The slide in oil prices and the increase in consumer spending, wasn't enough to boost confidence among manufacturers facing tighter bank lending and signs that the slowdown is extending to emerging economies.

IMF Forecasts

China's economic expansion, for example, slowed to 9 percent in the third quarter, the slowest pace in five years. The International Monetary Fund has forecast that global growth will slow to 3 percent in 2009 from 3.9 percent this year. That would mean a worldwide recession under the fund's informal definition -- growth of 3 percent or less.

``We agree now that China isn't immune to external forces,'' Jean-Pascal Tricoire, chief executive officer of circuit breaker maker Schneider Electric SA, said yesterday. ``We expect China to experience slower growth in the coming quarters.''

In the 15 countries sharing the euro, the IMF sees growth of 0.2 percent next year, the weakest since the single currency began trading in 1999. The compares with a 1.3 percent forecast for this year.

European Central Bank President Jean-Claude Trichet on Oct. 19 described the economy as in a ``very, very important growth slowdown.''

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