French GDP to Contract 0.8%, Recession to Follow, Insee Says

By Sandrine Rastello

Dec. 19 (Bloomberg) -- France’s economy, the second largest of the 15 countries sharing the euro, will contract by the most since 1974 this quarter and slip into a recession early next year, Insee, the national statistics office, forecast.

Gross domestic product will probably decline 0.8 percent this quarter, the most since the end of 1974, after a 0.1 percent increase in the three months through September, Insee economists said in Paris. The economy will shrink 0.4 percent in the first quarter, and 0.1 percent in the following three- months, Insee predicted.

The global credit crisis is aggravating a world economic slowdown, damping exports and hurting corporate investment. While President Nicolas Sarkozy’s 26 billion-euro ($37.5 billion) stimulus package may combine with slower inflation to provide some support for growth, rising unemployment is likely to put a lid on consumer spending, Insee predicts.

“Almost all developed countries will be in a recession next year and France will be no exception,” Insee’s chief forecaster Eric Dubois said at a briefing in Paris yesterday. “The tightening of credit conditions and a general aversion to risk prompts companies to cut investment and reduce inventories, such as in the car sector.”

Job Cuts

European car sales fell 26 percent in November, the biggest monthly drop since 1999. Auto makers Renault SA and PSA Peugeot Citroen are both shedding jobs and idling plants to confront the slump in demand. Valeo SA, France’s second-biggest maker of auto components, said yesterday it will eliminate 1,600 positions in France and 1,800 in other European countries.

Insee expects the economy to shed 191,000 jobs in the first half of next year, after forecasting a drop of 125,000 in the second half of 2008.

France has already agreed to aid the auto industry and has pledged 1 billion euros of low-interest loans to carmakers’ financing units, of which 779 million euros has already been paid out. The government is also funding 220 million euros in sales incentives on new cars and 100 million euros in assistance to smaller auto-parts suppliers.

Growth in France this year, at 0.8 percent will lag behind the euro region for a third year this year, according to the Insee forecasts.

Stimulus Impact

The government expects expansion of 0.2 to 0.5 percent this year. Under Insee’s forecasts, to get just 0 percent would require growth of 1.4 percent in both the third and the fourth quarter.

Dubois says Sarkozy’s stimulus plan should have a biggest impact in the second half, when he expects the economy to resume growing. He compared the current slowdown with that of 1993, rather than that of 1974-1975.

Insee sees consumer spending rising 0.1 percent this quarter, stagnating in the first quarter, before picking up, increasing 0.3 percent in the following three months.

Corporate investment will fall 1.6 percent this quarter, 1.7 percent next quarter, and 0.8 percent in April-June. Exports will slip 2.3 percent, 1.2 percent and 0.7 percent over the three quarters respectively.

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