French business confidence declined in May as recessions in at least six European countries weighed on demand and risked causing a quarterly contraction in France for the first time in three years.
Sentiment among factory executives fell to 93 from a revised 94 in April, the Bank of France said today in an e- mailed statement. That compares with the 93 predicted by the median of four economists’ estimates gathered by Bloomberg News.
Confidence has stagnated all year, last showing an increase in December, and today’s reading suggests Europe’s second- largest economy will shrink 0.1 percent in the second quarter, the central bank said. With neighbors such as Spain and Italy already in recession and unemployment crimping demand at home, French executives are restraining costs and may hold off on investment.
Companies are in “a cautious mood given the weakening order books,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London. “The rebound we initially expected in the second quarter” may not materialize and the possibility of a “negative quarter is increasingly likely.”
Gross domestic product in the 17-nation euro-area economy stalled in the first quarter as companies cut spending to weather the sovereign debt crisis, offsetting a gain in exports, the European Union statistics office in Luxembourg said June 6.
The European economy is struggling to gather strength after the need for new Greek elections and Spain’s worsening banking crisis heightened concerns that the single currency could splinter.
For French President Francois Hollande, the stalled economy presents a challenge after winning this year’s election on a promise to revive growth. After less than a month in office, he’s facing rising unemployment as companies from Air France-KLM Group (AF) to PSA Peugeot Citroen contemplate job cuts.
Any drop in France’s growth rate would also force the government to make deeper-than expected cuts to meet its target of reducing its budget deficit to 4.5 percent of GDP this year and 3 percent next year.
“Hollande’s honeymoon will be brief,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. “His biggest domestic challenge will be to restore order in public finances. It’s likely there will be fiscal slippage, given his optimistic growth assumptions and tendency to lean more towards raising revenues than cutting spending.”
Hollande, whose Socialist Party faces legislative elections on June 10 and 17, has promised to introduce a new budget to meet those targets in late June or early July.
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