French economy stalls, posing challenge for Hollande

PARIS Tue May 15, 2012 7:40am EDT

PARIS (Reuters) - France's economy stalled in the first quarter as household consumption flatlined, businesses pared back investment and exports slowed, underlining the challenge facing Socialist President Francois Hollande as he takes office on Tuesday.

It may add to his drive to push the euro zone to adopt growth as well as austerity policies.

The euro zone's second-largest economy posted zero growth in the first three months of the year, the INSEE national statistics institute said, after an anemic expansion of just 0.1 percent in the fourth quarter, revised down from 0.2 percent.

While the data indicated France's nearly 2 trillion euro economy avoided recession, it painted a grim outlook for 2012 and strengthened Hollande's case for a shift away from austerity in Europe towards more growth orientated policies, ahead of a meeting with German Chancellor Angela Merkel later in the day.

"There was no good surprise," said Philippe Waechter, chief economist at Natixis Asset Management. "There was weak consumption, no investment."

The zero percent growth figure was in line with the forecast of a Reuters poll of 31 economists and showed France's economy returning to stagnation after just two consecutive quarters of positive growth.

Its weak performance was cast in sharp relief by better-than-expected growth in Germany, where the economy expanded by 0.5 percent in the first quarter, bouncing back more strongly than expected from a small fourth-quarter contraction.

Growth in household consumption, the motor of France's economy, picked up slightly to 0.2 percent after 0.1 percent in the fourth quarter.

But capital investment fell 0.8 percent, after growing 1.3 percent in the fourth quarter, amid reports of companies struggling to access credit and holding back capital spending until after the April-May elections which gave France its first Socialist president since 1995

Net trade contributed a negative 0.1 percent to growth, as imports grew by 0.7 percent due to demand for refined petroleum products. Export growth slowed to 0.3 percent, amid weakness in southern European economies.

Restocking by companies provided a slender 0.1 percent boost to overall GDP growth.

"Export growth slowed, probably due to weak demand from France's main trading partners (Italy and Spain), which absorb around 15 percent of exports," said Joost Beaumont, senior economist at ABN Amro.

"Meanwhile, companies put investments on the shelf, most likely reflecting the uncertain economic outlook as well as tight lending conditions," he added.

Beaumont predicted these negative factors would remain in place, resulting in a slight contraction in second-quarter GDP. Thereafter, a fragile recovery would take hold, restrained by the need for ongoing fiscal consolidation in France and the economic weakness in its trading partners in southern Europe.

Hollande forecasts growth of 0.5 percent this year and 1.7 percent for 2013 but some expect him to lower these forecasts at July's extraordinary session of parliament to review the budget.

Despite becoming the figurehead for the fight-back against austerity in Europe, Hollande has pledged to respect France's EU commitment to cut its deficit to 3 percent of GDP by 2013, from 5.2 percent at the end of the year.

He aims to balance the budget by the end of his five year mandate - something no French president has achieved since 1974.

(Additional reporting by Jean-Baptiste Vey and Brian Love. Editing by Jeremy Gaunt.)