French industry is failing to produce thegoods its markets need and its loss of competitiveness has left
the government little room for manoeuvre to reflate the
economy, the Organisation for Economic Cooperation and
Development said.
    With gross domestic product likely to grow only 2.1 pct
this year, the same rate as last year, unemployment could climb
to 11.5 pct of the workforce by mid-1988, from its present 10.9
pct, it said in an annual review of the French economy.
    The report said the French economy was "increasingly
ill-adapted to demand" selling goods at "uncompetitive relative
prices on both domestic and export markets."
    "France's poor export performance reflects a geographical
bias in favour of markets less dynamic than the average...
And...A substantial loss of market share...In the past 18
months," it said.
    Pointing to a likely widening of the French trade deficit
to around 2.9 billion dlrs this year from 2.4 billion in 1986,
it warned that a further depreciation of the dollar against the
franc could lead to "a (renewed) loss of competitiveness
relative not only to the United States but also to the newly
industrialised countries."
    This could result in further major losses of market share,
particularly in the non-OECD area, which accounts for almost a
quarter of French exports, it said.
    Until the competitive ability of industry improved, the
authorities would have "little scope for macroeconomic
manoeuvre, even if the unemployment situation or the need to
encourage a pickup in investment could require demand to grow
more briskly," it added.
    But rising unemployment could help to hold down wage
demands, contributing to a slowdown in inflation to around a
two pct annual rate this year and early next, the OECD said.
    Written mainly in December last year, the report took no
account of a rise in oil prices early in 1987, and a 0.9 pct
surge in January consumer prices, caused partly by the
government's deregulation of service sector tariffs.
    "We took a bet that the freeing of prices would not provoke
runaway rises, and it is not absolutely certain that bet has
been lost," one OECD official commented.
    OECD officials said the January data and a rise in oil
prices above the 15 dlrs a barrel average assumed in the
report, indicated an upward revision in the inflation forecast
to around 2.5 or three pct.
    The government last week revised its forecast up to between
2.4 and 2.5 pct from two pct, against last year's 2.1 pct.
    But the OECD backed the government's view that the
underlying trend for inflation remained downwards this year,
with a slowdown in domestic costs taking over from last year's
fall in oil and commodity prices as the chief cause of
disinflation.
    With French unit productivity costs now among the lowest in
the OECD area, the inflation differential between France and
its main trading rival, West Germany, could fall to just one
pct this year, it said.
    On the other hand, the report noted, consumer prices for
industrial goods and private services have been rising steeply
as companies built up their profits.
    "For the disinflationary process to continue , and price
competitiveness to become lastingly compatible with exchange
rate stability, it is essential that wage restraint continue,"
it said.
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