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UPDATE 1-French consumer spending drops sharply in May

(Adds economists' comments, background)

By Joelle Diderich

PARIS, June 21 (Reuters) - French consumer spending fell sharply in May, in what some economists saw as the first sign of a prolonged retrenchment that could strip the euro zone's second largest economy of its principal motor for recovery.

National statistics office INSEE said on Friday that expenditure by French households dropped by a larger-than- expected 1.3 percent as voters hugged the sidelines between back-to-back elections for the presidency and parliament.

Consumer spending was up 2.0 percent year-on-year in May, INSEE said. It also revised the monthly rise in April down to 0.6 percent from 0.8 percent previously.

Economists polled by Reuters had expected consumer spending to ease by 0.1 percent in May, for a rise of 3.7 percent year-on-year.

Analysts said the figures heralded a longer-term slump in household spending, which has buffered the French economy against a drop in foreign demand for its export goods in the wake of the September 11 attacks.

"All of this indicates that consumer spending is on a downward trend," said Emmanuel Ferry, economist at Exane.

"It is proof that consumer spending is at a turning point as all the pillars that have supported it since 1998 fall away, namely employment, salaries, tax cuts and disinflation."

The figures come on the heels of stronger-than-expected consumer spending in March and April, though economists noted the April figure had been downwardly revised.

"It seems the rises seen in the last few months were not justified and this fall is in line with economic conditions," said Olivier Gasnier, economist at Societe Generale.

The data also contrasts with May consumer confidence figures showing household morale hitting its highest level this year.

Part of this was voter relief after far-right leader Jean-Marie Le Pen failed to make it through a second round runoff for the French presidency on May 5, after scoring a shock success in the first round of voting on April 21.

"Consumer morale rebounded very strongly in May due to an election effect, but it is a superficial recovery and there should be an alignment of confidence figures with consumer spending in coming months," said Gasnier.

MODEST GROWTH

Consumer spending was hit in May by a slump in car sales, which were down 2.3 percent month-on-month after a 1.1 percent increase in April. Meanwhile, sales of clothes and shoes plunged 7.8 percent after a 1.1 percent rise the previous month.

The gloomy outlook for consumer spending meant the French economy was likely to post only modest growth this year, with exports and restocking the main motors for recovery, Ferry said.

He predicted gross domestic product (GDP) would grow 1.1 percent in 2002, below the government's forecast for growth of around 1.5 percent.

French GDP grew 0.4 percent in the first quarter of 2002 after falling 0.4 percent in the last quarter of 2001.

Local companies have reported a cautious pick-up in business in recent weeks after a slow start to 2002.

Electrical equipment maker Schneider Electric SA said in May it would only meet its goal of keeping sales steady in 2002 versus 2001 if its markets recover.

"We are starting to progress again, to grow from extremely low levels," CEO Henri Lachmann told the company's annual shareholder meeting on May 27.

Meanwhile, cognac and liqueur group Remy Cointreau this month reported an 11.6 percent rise in full-year profit and said champagne sales had soared 60 percent since January after a depressed 2001.

(Additional reporting by Glaieul Mamaghani)