Aug. 28 (Bloomberg) -- French unemployment rose to the highest in almost three and a half years in July, threatening a recovery in consumer spending after Europe's third-largest economy contracted in the second quarter.

The number of jobseekers climbed by 20,000 from June to 2.62 million, the highest since February 2000, the Paris-based Labor Ministry said. The jobless rate rose to 9.6 percent from 9.5 percent last month.

``The economic situation is mediocre and the jobless rate will peak at 9.9 percent or 10 percent at the end of the year,'' said Philippe Brossard, head of research at Euler Hermes SA, the world's biggest credit insurer, in an interview earlier today. ``Bankruptcies, which rose 8 percent in the first half, will continue to climb in the second half and so will unemployment.''

France's economy, Europe's third biggest, shrank 0.3 percent in the second quarter, more than in Germany and Italy, as household spending declined for the first quarter since the end of 1996. Companies including Alstom SA and Schneider Electric SA are in the process of cutting jobs, and manufacturers in July said hiring intentions are at nine-year low.

Air Littoral SA, a regional airline that has about 1,000 employees, was placed under court administration last week so a court can decide whether the carrier can remain a viable business. Alstom, the Paris-based engineering company that is being rescued by the government, is cutting 5,000 jobs in Europe, including about 1,000 in France as orders decline.

Pressure on Raffarin

The climbing unemployment rate increases pressure on Prime Minister Jean-Pierre Raffarin to cut taxes and boost consumer spending. On Wednesday, he urged the rest of Europe to join France in taking steps to boost economic growth and employment, defying calls to bring the country's budget deficit below European limits next year.

``Rising unemployment and falling spending could send the economy in a vicious circle,'' said Christian de Boissieu, head of the prime minister's Council of Economic Analysis, in an interview Thursday.

Economists polled by Bloomberg News had expected an increase of 14,300 jobseekers in July, according to their median forecast.

French unemployment started rising in July 2001, and 322,000 workers have joined the jobless ranks since then. Consumer confidence is near a six-and-a-half-year low. The French economy will grow as little as 0.3 percent this year, the weakest pace since the 1993 recession, according to Olivier Gasnier, an economist with Societe Generale SA.

`Far From Euphoria'

``The situation is really far from euphoria,'' said Sylvie Domenech, an economist at the French plastic-makers federation, which has about 1,600 members, said in a telephone interview. ``The outlook may be for a further decline in jobs'' in coming months.

In Germany, whose budget deficit may also breach EU limits for a third year in 2004, unemployment rose in July near a five- year high reached in April. The jobless rate of the 12 nations sharing the euro held at 8.9 percent in June, the highest level in three and a half years.

Cie. de Saint-Gobain SA, the French manufacturer whose products range from perfume bottles to roof shingles, said last month it eliminated 2,000 jobs in the first half to cut costs. Cap Gemini SA, Europe's largest computer-services company, is cutting 6,739 jobs between early 2002 and early 2004.

In addition to rising unemployment, Raffarin's government is criticized by opposition parties for its handling of a heat wave that killed thousands of people earlier this year.

Popularity

As a result, Raffarin's popularity ratings fell four percentage points to 42 percent this month, the lowest level since he was appointed at the head of the government in May 2002, an Ipsos opinion polled showed Wednesday. That's likely to make it harder to overhaul the national health-care system whose deficit is swelling, something Raffarin has pledged to do.

The prospects for an economic recovery in France may rest with a rebound in neighboring countries, such as Germany. Business confidence in Germany rose to a 14-month high in August, and confidence among French manufacturers rose in July, the first increase this year.

``We're reasonably optimistic,'' Ernest-Antoine Seilliere, president of Medef, France's largest employers federation, said on radio station Europe 1 Tuesday. ``The global economy, on which we and Europe really depend, is recovering.''

The U.S. economy grew 3.1 percent in the second quarter, faster than the government estimated last month, and retail sales rose 1.4 percent in July, the biggest increase since March.

ECB Rate Cut

An interest-rate reduction by the European Central Bank in June and a halt in the euro's ascent against the dollar have also improved conditions for French companies. The euro has slipped 9 percent since reaching a record $1.1933 on May 27.

The ECB said on Aug. 7 it sees ``increasing reason'' to expect the region's economy to revive. The recovery is likely to start ``at the end of the year'' and gather pace in 2004, ECB board member Eugenio Domingo Solans, one of the bank's 18 policy makers, said last week.

Today's report, which is seasonally adjusted, is based on International Labor Organization standards. Under the government's preferred measure, the number of jobseekers fell 5,100 to 2.399 million last month.

Last Updated: August 28, 2003 16:25 EDT