French Consumers Keep Spending Despite Gloomy Outlook

French consumers increased their spending in January at a breathtaking pace, exceeding economists' forecast by over four times, while consumer confidence edged lower in February.

Consumer confidence dropped slightly to -43 from a revised -42 in January, as households grew wary of the economic crisis' impact on their personal finances.

However, spending on manufactured goods rose more than expected in January, as all categories posted strong growth, including cars, household appliances and clothes, data from France's national statistics office Insee showed Tuesday.

Consumer spending on manufactured products, a good proxy for overall consumption, rose 1.8% on the month in January, and was up 1.8% compared with the year-earlier period, Insee said.

"We won't repeat it enough: French households are fantastic," said Marc Touati, head of research at Global Equities. "After December's blues, they are defying widespread pessimism and keeping up spending."

Economists polled by Dow Jones Newswires had been much more cautious, expecting consumer spending to rise 0.4% both on the month and on the year. In December, consumer spending fell 0.9% on the month earlier.

French consumer spending is at odds with an economic situation that looks increasingly gloomy. The French economy shrank 1.2% in the last quarter of 2008 compared with the third quarter, its sharpest contraction since the 1993 recession. It is expected to contract by at least 0.4% in the first quarter of 2009 and by 0.1% in the second quarter, Insee has forecast.

However, unemployment in France is a worsening problem. The number of unemployed in December rose 2.2% from the month earlier to more than 2.1 million. But in the survey released Tuesday, consumers looked marginally more optimistic about joblessness in February than they did the month before, and a greater proportion believed in their ability to save, even if fewer thought the present time isn't a favorable moment to do so.

"These figures are themselves quite stunning," Touati added.

The global recession is proving tough for France, but on the upside, the economic slowdown has cut the inflation rate and boosted purchasing power. The January spending figures "are consistent with the strong slowdown of inflation, which passed from 3.5% last summer to less than 1% today," said Nicolas Bouzou, of think tank Asteres. "Even if it's something not directly felt by households, it has mechanically increased their purchasing power."

All manufactured good sectors - including cars - posted increases in January from the previous month. The strongest performance was from textile and leather products, whose sales rose 4.7%.

However, "One shouldn't get too optimistic and think that the shopping fever will go on for a long time," Touati said.

A fall in energy prices as well as the decreasing return on their savings is pushing French consumers to spend, he said, but this isn't going to continue indefinitely.