France seen tipping into recession, fiscal woes loom

By Brian Rohan

PARIS (Reuters) - France has fallen into its first recession in 15 years as it grapples with a global financial crisis, and its budget deficit will soar above the European Union's limit next year, a Reuters poll showed on Thursday.

Median forecasts from a poll of 16 economists conducted Oct 8-16 showed the economy is expected to have contracted 0.3 percent in the third quarter after shrinking 0.3 percent in the second quarter -- satisfying the technical definition of recession, which is two consecutive quarters of contraction.

Growth will only average 0.9 percent in 2008 and 0.5 percent in 2009, the poll found, undershooting the official government estimate of 1 percent for both years.

A similar poll in July forecast 2008 growth of 1.6 percent, but that was before the financial system seized up, U.S. and European banks were forced to seek government protection, and the economic environment turned sour for consumers and firms.

"Credit availability will be negatively affected, and thus the financing of capital expenditure and household investment," said Bruno Cavalier, head of macroeconomics at Oddo Securities.

Six of eight economists who answered a supplementary question predicted the recession would last 6-12 months, and the same number predicted it would be "average by historical standards."

"We think the recession will be average, and not deep, because the government will embark on a fiscal stimulus policy," said Gilles Moec, senior economist at Bank of America in London.

But the stimulus designed to keep the economy going will also contribute to the budget deficit, he said.

"Resources assigned to deal with the credit crunch probably won't effect the deficit, but other spending will," he said.

The poll showed the budget deficit is expected to rise to the EU's limit of 3.0 percent of gross domestic product (GDP) this year, and surpass it in 2009, when France is seen running a deficit of 3.4 percent of GDP.

The 2008 figure is unchanged from the last poll in July but the 2009 deficit forecast is sharply higher than the 3.0 percent predicted three months ago.

"The government will have to reconsider its growth forecasts by at least one point ... There will be tax revenue shortfalls and, against a backdrop of rising unemployment, an increase in social spending," said Cavalier at Oddo Securities.

Unemployment is expected to reverse the decline seen in recent years with analysts expecting a jobless rate of 7.7 percent in 2008 and 8.2 percent in 2009.

Consumer spending, one of the main motors of French growth, will rise 0.9 percent rise in 2008, the poll showed. That compares with a 2.5 percent increase for full-year 2007.

(FOR POLL DATA CLICK ON <SURVEY/>)

(Editing by Swaha Pattanaik)