Falling confidence indicates France is back in recession

Paris: French business confidence unexpectedly fell, providing the latest sign that Europe's second-largest economy is mired in recession.

A gauge of sentiment among factory managers fell to 91 from 94 in December, the national statistics office — Insee — said yesterday in Paris.

Economists forecast a reading of 95, according to the median of 15 estimates in a Bloomberg News survey. The decline lends weight to forecasts suggesting that France has entered its second recession in three years.

ECB efforts

By cutting interest rates twice since October and offering banks unlimited loans for three years, the European Central Bank (ECB) is attempting to reverse the downturn by boosting both financing for businesses and confidence, economists said. "This level of confidence is low and France is probably in a recession," said Michel Martinez, an economist at Societe Generale in Paris.

"Our expectation is that the economy has stalled or is shrinking, though this will be very mild, nothing like what happened in 2008 and 2009," Martinez said.

The French economy probably shrank 0.2 per cent in the fourth quarter and may shrink another 0.1 per cent in the first quarter, before expanding 0.1 per cent in the second quarter of 2012, Insee predicted on December 16.

The slowdown began in the middle of last year amid mounting concern that Europe's leaders were failing to get to grips with the region's debt crisis.

ECB president Mario Draghi said last week, 2012 will be a "much better" year for the euro area as governments push ahead with fiscal reforms and the benefits of the ECB's flood of cheap cash become more apparent.

"I am confident that the euro will be in better shape in 2012 because I look at the progress that has been achieved on the two root causes of the situation, namely lack of fiscal discipline and lack of structural reform," Draghi said at a press conference in Abu Dhabi.

Fiscal targets

Returning France to growth is key to helping the French government meet its fiscal targets after Standard and Poor's stripped the nation of its AAA credit rating for the first time and voters gear up for a presidential election in April and May.

President Nicolas Sarkozy has already pushed through two rounds of budget cuts and tax increases to protect the budget from the slowing economy and has vowed to do more if necessary. After raising sales tax on restaurants, hotels, public transport and other services, Sarkozy is also pressing for a more general increase in value added to tax to be balanced by a cut in payroll levies.

The increases may weigh on consumer spending in coming months at a time when joblessness is at the highest level in a decade.

The number of people actively looking for work at the end of November rose by 29,900, or 1.1 per cent, to 2,844,800, according to the Labour Ministry.

"The rise in direct taxes will weigh on consumption," said Dominique Barbet, an economist at BNP Paribas. "The unemployment rate will continue to increase."