France slips into recession

FRENCH leaders scrambled to reassure consumers, voters and investors today, after the official statistics agency warned that the eurozone's second largest economy had slipped into recession.

The French economy shrank by 0.3 per cent in the second quarter of the year, and on Friday the Insee agency forecast that gross domestic product would drop by a further 0.1 per cent in both the remaining quarters of 2008.

Economists define a recession as two successive quarters of negative growth but the government, desperate to maintain public confidence in the face of the global slowdown, steered deliberately clear of the term.

"Finance Minister Christine Lagarde now regards the risk of negative growth in autumn for the second quarter in a row as real," her ministry announced, confirming Insee's estimates in a statement Friday.

But neither Ms Lagarde, nor the French chairman of the European Central Bank, Jean-Claude Trichet, would confirm that the slowdown had tipped into recession for the first time since 1993.

"ECB experts tell us that we have slowing growth," he said on the French radio station Europe 1.

"I will not use any word other than that - slowing growth with significant risks that growth may become even weaker."

Budget Minister Eric Woerth noted that taking into account the whole of 2008, the economy ought to grow by one per cent.

"There's a technical and statistical definition, and there's the reality of things," he said, when asked if he would define the situation as a recession.

But the press and the opposition had no such reticence.

Both the right-wing Le Figaro and the left-wing Liberation dailies headlined on France's descent into recession, and the Socialist party leader seized on the figures as an opportunity to attack President Nicolas Sarkozy.

"Yes, the recession is here," Francois Hollande told the daily Le Parisien.

"This means the decisions, especially tax choices, made by Nicolas Sarkozy on the day after the presidential election have been revealed as inappropriate, ineffective and unfair and have amplified the shock of the global situation.

"His policy has failed," Mr Hollande said.

French unemployment rose by more than 40,000 in August, the biggest one-month spike in 15 years, and Insee now predicts that the unemployment rate will rise to 7.4 per cent in the third quarter from 7.2.

If the Insee forecast is correct, France could be the second member of the eurozone single currency bloc to confirm a recession after Ireland.

It comes as economies around the world are wilting from the effects of a year of surging energy prices and the financial catastrophe that erupted when US and British banks found themselves exposed to billions in bad debt.

The European Commission predicts that economic heavyweights Germany, Britain and Spain are also headed for recession this year, raising the spectre of rising unemployment and business failures across the continent.

"At this stage the danger is in particular a reflection of the effects of the exceptional surge in the oil price and the value of the euro in the first quarter, and of the worsening financial crisis," the finance ministry said.

"Christine Lagarde believes the urgent need today is to re-establish confidence in financial markets, in order that this difficult economic climate remains temporary.

"At the same time continuing with structural reform will permit the French economy to enjoy durable growth in the medium term."

On Thursday, the French Government announced it would buy up 30,000 homes to boost the housing market and release 22 billion euros in business loans.

The European financial sector has been badly hit by the fallout from the crisis on Wall Street, and
France, Britain, Germany and the Benelux countries have had to mount bail-outs and partial nationalisations to save banks.

In the immediate term, leaders have pinned their hopes on the US Congress approving a $US700 billion ($A908.21 billion) bail-out for its own banks and on a summit tomorrow of leaders from Britain, France, Germany and Italy.

News.com.au