Dec. 16 (Bloomberg) -- The French economy will shrink this quarter and next, suggesting the nation is in a recession as investment and consumer spending stagnate, national statistics office Insee said.
The euro area’s second-largest economy will shrink 0.2 percent in the fourth quarter and 0.1 percent in the first quarter of 2012, before expanding 0.1 percent in the following three months, Paris-based Insee said yesterday in its quarterly forecast.
Confidence is slumping as businesses cut back on investment and slash jobs in the face of Europe’s deepening sovereign debt crisis. That’s driving up unemployment and prompting households to rein in spending. A shrinking economy may present a challenge to President Nicolas Sarkozy as he prepares for a two-round election in April and May of next year.
“Corporate demand, which has been driving the recovery for two years, should end up sagging,” Insee said. “Faced with a deteriorating labor market and stagnating purchasing power, households will maintain a high level of savings and consumption is unlikely to sustain growth.”
Sarkozy’s government has counted on growth of between 0.5 percent and 1 percent in 2012 to meet its budget targets. On the basis of today’s forecasts, the economy would have to grow 1.3 percent in both the third and fourth quarters of 2012 to achieve an annual growth rate of 1 percent.
After driving France’s recovery since the last recession ended in early 2009, corporate investment began declining in the third quarter of this year with a 0.3 percent drop.
Investment by non-financial companies will fall 0.5 percent and 0.6 percent in the fourth and first quarters, Insee said. Household spending will gain 0.1 percent in each of the quarters.
“The impetus from domestic demand seems to have ground to a halt,” Insee said. With unemployment set to increase to 10 percent by the middle of next year, internal demand will probably “remain weak” in coming months, it added.
Insee estimates that French inflation will be about 1.4 percent by June, down from 2.3 percent in October.
--Editors: Andrew Atkinson, Fergal O’Brien
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