French don't believe their luck as economy starts to recover

John Lichfield reports from Paris on how ingrained pessimism disguises an unexpected return to prosperity

FRANCE is stirring but it seems the French themselves cannot quite believe it.

Every indicator suggests the economy is on the threshold of a boom, or at least a very strong recovery this year. Consumers are spending, business is investing, exporters are exporting at record levels. Interest rates are low and inflation has almost ceased to exist (prices went DOWN slightly in January). France reached the targets for membership of economic and monetary union (Emu) last week, with some trickery, but without great pain.

There is even a good chance that France's high unemployment, which has been edging down for three months, could begin to shrink substantially in 1998. None the less, according to a Europe-wide poll, published last week, French consumers are by far the gloomiest in the European Union; 61 per cent said they expected no rapid improvement in their standard of living. Pessimism, it seems, has become ingrained in the French psyche.

In reality, France is more buoyant than it admits. There are three tell- tale signs. First, both the President Jacques Chirac and the Prime Minister Lionel Jospin - but especially President Chirac - are wafting upwards in the opinion polls. Second, French consumers are consuming heavily for the first time in years (there was a 2.6 per cent jump in household purchases in January).

Thirdly, French business, which has been deeply, even ostentatiously, gloomy in public, is planning to invest in France in a big way in 1998.

An official survey found business would spend 10 per cent more on capital investment this year, three times the government's forecast. French business leaders were rather embarrassed by these findings: they had been insisting that government proposals to move towards a 35-hour working week to create jobs would pull the plug on domestic and foreign investment.

The economy minister, Dominique Strauss-Kahn, whose sleight of hand and sureness of touch have contributed something to the recovery, said last week: "The outlook for economy and employment have not been so good for 30 years." That, as the minister no doubt calculated, takes one back to 1968, the year of student and worker revolt which marked the end of the golden period of prosperity after the war.

Only 10 months ago, President Chirac called (and lost) a snap election partly because he thought the economy was going to nose-dive. Only six weeks ago, there were (exaggerated) predictions of mayhem on the streets when the far-left mobilised sustained protests by the long-time unemployed for the first time.

What has gone unexpectedly right?

Firstly, there has been a recovery of consumer spending since the Jospin government came to power last June. The government is not responsible for the recovery; it was lucky. The most that can be said is that it ditched enough of its campaign promises to avoid killing a cyclical recovery, which had already begun.

Secondly, exports have continued to boom, thanks to a high dollar and the increasing competitiveness of French industry. One of the concerns for the strength of the recovery is that a large chunk of these exports - especially in luxury goods - is to Asian countries which abruptly find themselves in difficulties. Economic ministry officials say the Asian crisis may dent the French recovery but will not destroy it. They still believe 3 per cent growth is possible this year. This would mean a substantial drop on the headline level of unemployment, already down to 12.1 per cent from 12.5 per cent a year ago.

Mr Strauss-Kahn warned stiffly at the weekend that France had "eaten its seed-corn" too often in the past: ie, killed growth by excessive public spending and excessive pay awards. It must not happen again, he said.