The growth forecast is “substantially weaker than anticipated earlier,” the IMF said in a report published on its website. The report was criticized by the French government as the forecast was much lower than the growth rate of 2.25% projected in 2008 budget of France. It is “unreasonable” to slash the growth forecast since France has carried out structural reforms and is now in a better financial status than other countries in the eurozone, an advisor of French Economy Minister Christine Lagarde said.

The International Monetary Fund has cut the forecast for the eurozone’s average growth to 1.6% at the end of January 2008, without projecting respective forecast for the members.

 

 
French inflation rose to its highest annual level in at least 11 years in January, reinforcing public concerns about rising living costs that have damaged President Nicolas Sarkozy’s popularity. Prices paid by consumers in the euro zone’s second biggest economy were flat month on month but rose 3.2% from a year earlier on an EU harmonized basis, driven by surging energy and food prices, statistics office INSEE said on Thursday. That year-on-year increase was bigger than the 3.0% forecast in a Reuters poll of 27 analysts and the highest rate on record for annual EU harmonized inflation data, which was first compiled in January 1997. “The striking thing is that French inflation had been quite a bit below the euro area average over the past 12 months or so and now it’s quite rapidly caught up with other major euro area countries like Germany,” ABN AMRO economist Dominic White said.

The rising cost of living and high food prices in particular have been among the main concerns of voters ahead of next month’s municipal elections, and Sarkozy’s approval ratings have fallen to as low as 39% in the latest IPSOS poll. “What I’m worried about is purchasing power,” Sarkozy told reporters during a visit in northern France, adding that the government would be taking extra steps in addition to measures already introduced including tax breaks on overtime work. As well as food, fuel and energy prices have risen sharply, with prices in the energy segment climbing 12.3% from a year earlier and petroleum products jumping 19.1%.

Damaged consumer spending?
Sarkozy has been weakened by public unease about his hyperactive presidential style, his friendship with some of France’s richest business tycoons and his high-profile romance with former Italian supermodel Carla Bruni, who is now his wife. But issues like the cost of living, wages and pensions are at the heart of voter discontent, according to pollsters.

French growth came in below the government’s 2.0-2.5% forecast range last year and the IMF predicts that growth will reach 1.5% this year, well short of the unchanged government target. Consumer spending has been the driving force behind French growth and higher prices could further undermine confidence in the months ahead. “The higher the inflation, the lower the purchasing power,” said Asteres economist Nicolas Bouzou, adding that consumer spending may have been weakening further in the Q1. More broadly, French inflation is part of a bigger headache confronting the European Central Bank as growth in the region shows signs of losing momentum, meaning a boost to confidence from lower interest rates may be unlikely.

The ECB targets euro zone inflation at just below 2.0% and has not followed the United States and others in cutting its benchmark rate, currently at 4%. For the ECB, “inflation concerns are still right at the forefront,” White said. “Concerns about growth have become a bit more pronounced over the past few months, but given where inflation is right now and the prospect that it can remain fairly animated throughout much of 2008, it’s far too soon to be talking about the ECB leaning towards a bias for cutting rates,” he added. (Reuters)