Aug. 14 (Bloomberg) -- The French economy contracted for the first time in more than five years in the second quarter as exports declined and companies cut spending.

Gross domestic product of the euro-region's second-largest economy fell 0.3 percent from the first quarter, when it rose 0.4 percent, national statistics office Insee in Paris said today. That's the first drop since the fourth quarter of 2002. Economists expected growth of 0.1 percent, the median of 24 estimates in a Bloomberg News survey showed.

The French economy is faltering as oil-driven inflation erodes consumers' purchasing power just as the stronger euro and slowing global growth sap export demand. European Central Bank President Jean-Claude Trichet said Aug. 7 growth will be ``particularly weak'' in the six months through September.

``The figure is quite startling,'' said Matthew Sharratt, an economist at Bank of America in London. ``We're clearly looking at revising our full-year growth forecast'' of 1.4 percent.

Growth in the first quarter was revised down from a previously reported 0.5 percent, Insee said. In the year, the economy expanded 1.1 percent.

In the economy of the 15 nations sharing the euro, GDP fell 0.2 percent in the second quarter from the first, the European Union's statistics office in Luxembourg said today. In Germany and Italy, there was also contraction.

Euro, Oil

French growth may weaken to 1.6 percent this year from 2.2 percent in 2007, the International Monetary Fund in Washington said last month. That's below the growth pace projected for the euro-region economy of 1.7 percent this year.

Adding to signs of slowdown, industrial production, which accounts for 15 percent of the French economy, fell for a second month in June. French business confidence declined to the lowest in more than three years in July and manufacturing shrank.

European companies are being hurt by the euro's 10 percent ascent against the dollar over the past year, which is making exports less competitive abroad. Over the same period, crude oil prices have increased 62 percent, sapping the spending power of both companies and consumers.

Earnings Suffer

Renault SA, France's second-largest carmaker, said on July 24 it will be forced to cut jobs and trim production costs to meet its profit-margin goal for next year. Carrefour SA, Europe's largest retailer, said last month that second-quarter sales growth slowed as weaker consumer spending hurt business at French hypermarkets.

In the second quarter, exports declined 2 percent from the previous three months, when they rose 2.4 percent, today's report showed. Consumer spending rose 0.1 percent in the three months through June after falling 0.1 percent in the first quarter. Corporate investments declined 1 percent in the second quarter after rising 1.2 percent.

``The economy is being hit on all fronts,'' said Diego Iscaro, an economist at Global Insight in London in an e-mailed note today. ``We don't see a significant change in this situation in the coming months.''

`Difficult' Situation

Some companies are bolstering earnings in faster-growing economies. Schneider Electric SA, the world's largest maker of circuit breakers based near Paris, on Aug. 1 raised its 2008 sales forecast on demand in China.

The Frankfurt-based ECB on Aug. 7 left its benchmark interest rate at 4.25 percent to fight inflation even as growth weakens. In France, inflation held at 4 percent last month, matching the fastest pace in at least 12 years.

Still, with oil prices down 19 percent from a July 11 record of $147.27 a barrel and companies adding workers, consumers may step up spending. French Finance Minister Christine Lagarde told France Inter radio today that she still expects the economy to strengthen toward the end of 2008.

``It's obvious that the situation is difficult,'' Lagarde said in the interview. But ``it's out of the question to talk of a recession'' in France.

To contact the reporters on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: August 14, 2008 05:48 EDT