French Economy Entered Recession in Third Quarter, Insee Says

By Sandrine Rastello

Oct. 3 (Bloomberg) -- France's economy, the second largest of the 15 countries sharing the euro, slipped into recession for the first time in more than 15 years in the third quarter, Insee, the national statistics office, forecast.

Gross domestic product probably shrank 0.1 percent in the third quarter after a contraction of 0.3 percent in the three months through June, Insee economists said in Paris. The economy will also shrink 0.1 percent in the final three months to cut growth to 0.9 percent for the full year, the slowest pace since 1993, Insee said.

The global credit crisis is threatening to further aggravate a global economic slowdown as credit for new investment dries up. Insee predicts consumer spending, which has fueled growth over the past years, will stagnate in the second half as both employment and the real estate market deteriorate.

``The French economy continues to be hurt,'' Insee's chief forecaster Eric Dubois said at a briefing in Paris yesterday. The current credit crisis ``is an important risk,'' he said, as well as oil prices, ``which have become more volatile.''

Growth in France will lag behind the euro region for a third year, according to the Insee forecasts. The government, which sees expansion this year and next of around 1 percent, last week shelved plans to narrow its budget deficit as the slowdown dents tax receipts and boosts welfare costs.

EU Recession?

The economy of the euro zone also contracted in the second quarter and the global credit crisis is pushing the region closer to recession as well. Confidence in the economic outlook for the euro area is the lowest since the slump following the Sept. 11 terrorist attacks in 2001, according to the European Commission.

President Nicolas Sarkozy's 8 billion euros ($11 billion) of tax cuts this year were not enough to buoy French growth as surging commodities prices fanned inflation and global demand cooled.

Yesterday Sarkozy said the government will buy more than 30,000 unfinished homes at a discount to underpin the slumping real estate market. French housing starts fell 13 percent to 394,726 in the June-August period from a year earlier and the weaker demand has begun to drive down the price of existing homes.

Insee sees consumer spending stagnating in the second half and unemployment rising to 7.8 percent by the end of the year, from 7.6 percent in the second quarter.

Corporate investment will fall 0.2 percent this quarter and 0.1 percent in the last three months of the year, it predicted. Exports will rise 0.1 percent before falling 0.2 percent, while imports will drop 0.1 percent and then increase at the same pace in the fourth quarter, it forecast.

To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net;