French industry output shrinks in June, recovery seen tentative

PARIS Fri Aug 9, 2013 9:03am EDT

French President Francois Hollande visits the IXBlue company in Marly-le-Roi near Paris, August 8, 2013. REUTERS/Christian Hartmann

French President Francois Hollande visits the IXBlue company in Marly-le-Roi near Paris, August 8, 2013.

Credit: Reuters/Christian Hartmann

PARIS (Reuters) - French industrial output unexpectedly shrank in June, underscoring the fragility of a hoped-for recovery in the euro zone's second-largest economy.

A series of positive indicators, including better than expected industrial output in April and May, have prompted President Francois Hollande to tout that recovery "is here."

But Friday's figures showing industrial output rising in the second quarter but down in June - a trend also seen in consumer spending - offer more evidence that while the economy may have exited a shallow recession, it is still basically flat.

Statistics agency INSEE will publish second quarter GDP data on Wednesday. It has said that France's 2 trillion euro economy probably eked out 0.2 percent growth after two quarters of mild contraction - not enough to keep the economy from shrinking by 0.1 percent in 2013 as a whole.

"Still-difficult domestic conditions mean that any improvement is likely to be gradual and prone to relapses," said Diego Iscaro, economist at IHS Global Insight.

Despite what he describes as a brighter outlook for the industrial sector, Iscaro forecast economic growth of at best 0.1 percent in the second quarter and a 0.3 percent contraction in 2013 as a whole, in line with a Reuters poll of economists.

French industrial output fell by 1.4 percent in June from the previous month, largely due to a sharp contraction in electricity production as the weather turned better and a drop in food production, data from INSEE showed on Friday.

The reading widely missed expectations in a Reuters poll for a 0.1 percent rise. Industrial output was up 1.4 percent for the second quarter, however, thanks to a sharp rise in April.

NOT LIKE GERMANY

Highlighting a growing divide between the euro zone's two largest economies, German industrial output rose at its fastest pace in nearly two years in June, fuelling expectations of second quarter growth of up to 1 percent there.

"With these (French) industrial production and consumption readings, and foreign trade not looking great, we should have 0.1 percent growth in the second quarter. We do not see the same momentum as in Germany," said Philippe Waechter, chief economist at Natixis Asset Management.

Finance Minister Pierre Moscovici has hinted the government could cut its 1.2 percent growth forecast for 2014 to put it in line with the IMF's 0.8 percent projection. On Friday, he highlighted the positive quarterly industrial output reading, saying this was essential for a return to growth.

A separate set of data showed the budget deficit widened in June, underscoring the government's struggle to rein in public finances, with an increase in tax intakes not enough to compensate for higher spending as the crisis bites.

The French economy has not grown by more than 0.2 percent in any quarter since early 2011 and the Bank of France said on Wednesday it would continue to eke out only minimal growth in the third quarter. The central bank's 0.1 percent forecast dented hopes that activity might be gaining momentum.

Other economic data and business confidence surveys have suggested France may be pulling out of recession, but that muted domestic demand is still holding back the economy.

Earlier this week, Markit's purchasing managers index (PMI) showed France's manufacturing activity shrank at its slowest pace in 17 months in July.

Data on Wednesday showed the trade deficit shrank sharply in June but that was due in large part to a drop in imports, which were at their lowest since December 2010, suggesting consumers are still reluctant to spend.

Consumer spending, a traditional driver of the economy, shrank in June after a bounce in May, with both moves largely due - like industrial output - to weather conditions.

Businesses and economists point out that data is still too fragile to help the Socialist government fulfill its pledge to reverse by year-end a rise in unemployment, currently stuck above 10 percent.

(Additional reporting by Yann Le Guernigou; Editing by Catherine Evans)

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