French Economy Shrinks as Businesses Hold Off on Investment

The French economy unexpectedly shrank in the third quarter as President Francois Hollande failed to revive corporate investment in the face of one of the world’s heaviest tax burdens.

Gross domestic product fell 0.1 percent in the three months through September, national statistics office Insee said in an e-mailed statement. Economists forecast no growth, according to the median of 24 estimates in a Bloomberg News survey.

The figures, which follow France’s exit from recession in the second quarter, underline the issues Hollande is confronting as he tries to revive Europe’s second-largest economy and reverse an increase in unemployment that’s at a 14-year high. Facing taxes equivalent to 46 percent of GDP, companies such as Cie de Saint Gobain SA are cutting investment spending or holding off raising it.

“The French economy may have touched bottom but companies are still hesitating,” said Michel Martinez, an economist at Societe Generale in Paris. “There remains huge uncertainty around economic policy and profit margins are among the weakest in Europe. The upshot is that we have a recovery but a tepid one.”

Investment spending by non-financial companies fell 0.6 percent in the quarter, while consumer spending rose 0.2 percent.

Standard & Poor’s, which last week cut France’s sovereign credit rating, estimates that government revenue amounts to 53 percent of GDP, the highest of any country outside Scandinavia. French state spending totals more than 56 percent of GDP, the highest in the euro area and second-highest among members of the Organization for Economic Cooperation and Development, according to S&P.

Thin Margins

Across the French economy, corporate profit margins are at their lowest level since the mid-1980s. Operating margins at French companies have contracted almost 40 percent in the last decade, figures from the Groupe des Federations Industrielles show. The operating margins of German companies have gained about 40 percent, GFI estimates.

Hollande has sought to shore up the competitiveness of French businesses by offering a payroll tax credit starting this year, by paring government spending and easing labor laws. Yet S&P and the European Commission say those efforts haven’t gone far enough.

“The recent competitiveness reforms are expected to gradually reduce the pace of losses in export market shares, although without fully reversing the trend,” the European Union’s executive arm said in a report Nov. 5. “Entrepreneurs are likely to give priority to the restoration of their profit margins before considering investing,” it said, adding that it doesn’t expect an investment recovery before 2015.

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