French Business Confidence Unexpectedly Drops

French business confidence unexpectedly fell to the lowest in almost two years this month, providing the latest sign that Europe’s second-largest economy is mired in a recession.

A gage of sentiment among factory managers fell to 91 from 94 in December, national statistics office Insee said today in Paris. That’s the lowest since February 2010. Economists forecast a reading of 95, according to the median of 15 estimates in a Bloomberg News survey.

The decline lends weight to forecasts suggesting that France has entered its second recession in three years as European leaders try to end the region’s debt crisis. Finance ministers will meet in Brussels today to discuss new budget rules, a financial firewall to protect indebted states and a Greek debt swap as part of a long-term fix to the turmoil.

“This level of confidence is low and France is probably in a recession,” said Michel Martinez, an economist at Societe Generale in Paris. “Our expectation is that the economy has stalled or is shrinking, though this will be very mild, nothing like what happened in 2008 and 2009.”

The euro was little changed against the dollar and traded at $1.2933 as of 9:42 a.m. in Paris.

Demand Weakens

An index of companies’ orders fell to minus 32 in January from minus 26 last month, Insee said. Gauges of export orders and the outlook for production also declined. The survey of about 4,000 companies was conducted in the week before publication.

The French economy probably shrank 0.2 percent in the fourth quarter and may shrink another 0.1 percent in the current three-month period, before expanding 0.1 percent in the second quarter of 2012, Insee forecast on Dec. 16. The slowdown began in the middle of last year amid mounting concern that Europe’s leaders were failing to get to grips with the debt crisis.

As the turmoil mounted, the European Central Bank cut interest rates twice since November and offered banks banks unlimited loans for three years to prevent a credit crunch. ECB President Mario Draghi said on Jan. 19 that 2012 will be a “much better” year for the euro area as governments push ahead with fiscal reforms and the benefits of the flood of cheap cash become more apparent.

“I am confident that the euro will be in better shape in 2012 because I look at the progress that has been achieved on the two root causes of the situation, namely lack of fiscal discipline and lack of structural reform,” Draghi said at a press conference in Abu Dhabi.

AAA Rating

Returning France to growth is key to helping the government meet its fiscal targets after Standard & Poor’s stripped the nation of its AAA credit rating for the first time.

President Nicolas Sarkozy, facing an election this year, has already pushed through two rounds of spending cuts and tax increases to protect the budget and has vowed to do more if necessary. After raising sales tax on restaurants, hotels, public transport and other services, Sarkozy is also pressing for a more general increase in value-added tax to be balanced by a cut in payroll levies.

The increases may weigh on consumer spending at a time when joblessness is at the highest level in a decade. The number of people actively looking for work at the end of November rose by 29,900, or 1.1 percent, to 2,844,800, according to the Labor Ministry, which publishes December figures later this week.

“The rise in direct taxes will weigh on consumption,” said Dominique Barbet, an economist at BNP Paribas in Paris. “The unemployment rate will continue to increase.”

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

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

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