French Economy Stalls With Decline in Consumer Spending as Exports Dwindle

France’s economy unexpectedly stalled in the second quarter as consumer spending plunged just as investors spooked by Europe’s debt crisis turn their attention to the euro region’s second-largest economy.

Gross domestic product was unchanged from the first quarter, when it rose 0.9 percent, the most in four years, Paris-based statistics office Insee said today. Economists forecast a 0.3 percent gain, the median of 15 estimates in a Bloomberg News survey showed.

The slowdown may jeopardize President Nicolas Sarkozy’s target of 2 percent growth for 2011, a key component in the government’s plans to reduce its deficit. Concerns about debt and slow growth have caused credit default swaps on French government bonds to double in the past six weeks. Swaps approached a record high today.

“We will not have tremendous growth especially with these austerity programs,” Philippe d’Arvisenet, a global economist at BNP Paribas in Paris, said in an interview with Bloomberg Television. Even so, austerity measures are “inescapable,” he said. Otherwise, “you have more turmoil in the markets.”

‘Determination’

France moved center-stage in the debt crisis this week, as the yield on government debt compared to German bonds rose to a euro-era record. France’s CAC 40 Index plunged 5.5 percent on Aug. 10, dragged down by banks including Societe Generale SA, which is heading for a 19 percent retreat this week. Sarkozy and German Chancellor Angela Merkel will meet in Paris on Aug. 16 to discuss the crisis.

The French government will hold firm to its deficit- reduction targets and its growth forecasts, Finance Minister Francois Baroin said after today’s report.

“No one should doubt our determination to respect the deficit targets that the president of the republic has fixed,” Baroin said in an interview on RTL Radio. He said tax levels would not rise, and the deficit reduction would come from spending cuts.

France has pledged to reduce the deficit to 5.7 percent of output this year and 4.6 percent in 2012. It then aims to reduce it to 3 percent and 2 percent in the two following years. The International Monetary Fund said last month that on current plans, France will fail to achieve its targets in 2012 and 2013.

Consumer spending, previously the motor for the French economy, fell 0.7 percent in the report, while exports were flat. Investment was the only significant contributor to growth, gaining 0.9 percent.

‘Still Investing’

“The good news is that companies are still investing,” Michel Martinez, an economist at Societe Generale in Paris, said before the data came out. “The concerns are about competitiveness and slowing world trade.”

Sarkozy this week moved up the process of approving the 2012 budget by a month, announcing a meeting of his inner Cabinet on Aug. 24.

France “is set to miss” its deficit target “unless it takes further action,” Christian Schulz, an economist at Berenberg Bank in London, said in a note to clients. “While the miss may not be large, the evidence and expectation of slower growth and more fiscal drag is likely to fuel the nervousness of markets.”

Efforts to reduce the deficit could further hit growth, said d’Arvisenet at BNP.

‘Never Happy’

“Markets are never happy,” he said. “We want growth but also we want consolidation. You give consolidation, they are not happy because there is no growth. There is growth but no consolidation, they are not happy.”

The spread between the yield on French 10-year government debt and benchmark German bunds rose as high as 89 basis points this week from 40 at the start of July. It was at 71 basis points today.

Credit default swaps on France have doubled in the past six weeks to 169.8 basis points, more than triple the U.S., which last week lost its top rating at Standard & Poor’s. Swaps on France rose 4 basis points to 173, within 1.5 basis points of a closing-price record high, according to CMA at 9 a.m. in London. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

The French government expects the economy to grow 2 percent this year and 2.25 percent in 2012. The IMF predicts growth of 2.1 percent and 1.9 percent. Schulz said France’s long-term growth prospects remain “intact” because of the lack of any real-estate or credit bubble.

Growth Forecasts

D’Arvisenet at BNP said the government may have to cut its 2011 forecast to 1.7 or 1.8 percent growth. Jennifer McKeown, senior European economist at Capital Economics in London, said she’s now expecting expansion of 1.5 percent this year.

“Next week’s release might show that Germany performed a bit better, but with Italy and Spain barely growing, the euro- zone as a whole will have managed only a very modest expansion in the second quarter,” McKeown said in a note to clients. “As for France itself, the 0.7 percent drop in consumer spending was the sharpest in nearly 15 years, suggesting that the household sector can no longer be relied upon to support the economy.”

Even with a record trade deficit of more than 7 billion euros in both April and May, international trade added 0.3 percent to growth in the second quarter because of a 0.9 percent decline in imports, Insee said.

Baroin said the slowdown in consumer spending resulted from the expiry of a government-funded rebate system for buyers of new cars.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Gregory Viscusi in Paris at gviscusi@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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