Paris: France will fall into recession next year for the first time since 1993 and faces a steep rise in unemployment, the state statistics agency said on Friday in its official economic forecast.
While hard hit by the global economic crisis, France has so far not been in recession as defined as two quarters of negative growth, and the government predicts 2009 will see a slender expansion in the economy.
But the INSEE agency’s verdict was bleak. The French economy grew by only 0.1% in the third quarter of this year, shrank by 0.8% in this quarter and will contract again by 0.4% in the first quarter of 2009.
The agency hopes for a slow recovery after that, but gross domestic product could still decline by 0.1% in the second quarter - marking a nine month long contraction - and 2009 as a whole could still see negative growth.
“The business climate has considerably deteriorated in France in the last year and a half, coming close to the levels seen in the 1993 recession,” the report, released in Paris, said.
“Tighter lending and an all round rise in risk aversion are pushing firms to cut down on investment and expenditure and to scale back their inventories sharply,” the report, entitled “Recessions,” warned.
The agency predicted that the unemployment rate will rise to 8% by the middle of next year, up from 7.3 in September this year.
Several French banks have been weakened by the global credit credit crunch and some have found themselves swept up in the panic surrounding the Madoff fraud and the full extent of their losses are still unclear.
INSEE’s report is bad news for President Nicolas Sarkozy, who came to power last year vowing to boost French voters’ spending power and now faces years of economic slowdown and rising welfare bills.
Experts had already predicted falling growth last year but Sarkozy’s finance minister, Christine Lagarde, has promised growth of more than 0.2% over 2009, once the effects of an economic stimulus package come through.
This now seems over optimistic.
Sarkozy hopes to shore up the eurozone’s second largest economy by guaranteeing bank deposits, buying government stakes in key industries and setting up a $33 billion stimulus package.
Nevertheless, French industry is in crisis, with the building trade and the key car-making sector - which alone accounts for 10% of the workforce - particularly hard hit.
INSEE predicts French exports will drop by three percent by the middle of next year, and manufacturers’ woes are set to continue as the firms dump excess stock on a shrinking domestic market.
Industrial production will fall by 4% in the last quarter of 2008 and by a further 1.6% in the first quarter of next, with a similar decline in the construction sector.