July 9, 2012 / 6:50 AM / in 5 years

French economy stumbles as business morale dips

PARIS (Reuters) - France’s central bank said it expects the euro zone’s second largest economy to have shrunk in the second quarter, with business sentiment worsening under the weight of weak domestic demand and higher taxes.

The Bank of France stuck on Monday with last month’s forecast for a 0.1 percent GDP contraction, leaving the near 2 trillion euro ($2.5 trillion) economy - which posted zero growth in the first three months of the year - on the brink of recession.

Opening an industrial relations conference, President Francois Hollande said the economy would flatline over the first half of the year.

The central bank’s monthly business sentiment indicator, meanwhile, fell in June to levels not seen since late 2009 when the economy was emerging from its worst post-war slump.

The data will add to the discomfort of Hollande, elected in May at the head of a Socialist government promising to avoid the painful bouts of austerity that have multiplied across other parts of Europe.

France’s slowdown has hit state revenues, and in his first major set of economic measures last Wednesday, Hollande announced tax rises worth 7.2 billion euros, singling out large companies and the rich.

“French business confidence remains low due to an anemic domestic market and (the) new taxes announced (last week),” ING economist Manuel Maleki said.

“Moreover, the poor international climate and the uncertainty regarding the future of the euro zone have hit (the index).”

Sentiment for the industrial sector eased to 91 from 92 in May with a decline in the auto industry offset by an improvement in pharmaceuticals and the agro-food industry. Services sentiment fell to 90 from 92 with the outlook for the coming months clouded by high uncertainty.

Facing deteriorating business conditions, many French companies are slashing their headcount and, with unemployment rates already running at 13-year high, the CGT union fears as many as 75,000 further jobs may be on the line.

($1 = 0.8126 euros)

Reporting by Leigh Thomas; Editing by John Stonestreet

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