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France's President Francois Hollande sits in the stands during the evening session of the swimming events at the London 2012 Olympic Games at the Aquatics Centre July 30, 2012. (MICHAEL DALDER/REUTERS)
France's President Francois Hollande sits in the stands during the evening session of the swimming events at the London 2012 Olympic Games at the Aquatics Centre July 30, 2012. (MICHAEL DALDER/REUTERS)

France heads back into recession Add to ...

France is headed back into recession for the second time in three years, its central bank warned Wednesday in a setback for the recovery prospects of the stricken euro zone.

In a downbeat survey on the outlook for Europe’s second biggest economy, the Bank of France predicted a 0.1 per cent contraction in gross domestic product (GDP) for the third quarter of this year.

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If that outcome is confirmed it would follow a similar fall in output for the three months to June and zero growth in the first quarter of 2012.

The Bank of France’s survey followed worse-than-expected data from neighbouring Italy and Germany earlier this week.

Italy reported Tuesday that second-quarter GDP was 2.5 per cent lower than a year earlier while German industrial orders dropped 1.7 per cent in May, largely as a result of slumping demand from within the 17-member euro zone.

The gloomy data have dampened a wave of optimism that an end to the euro zone crisis could be in sight.

European stock markets have rallied strongly over recent days on a growing confidence that euro zone politicians and bankers will do what is required to ensure the survival of the currency.

France emerged from its last recession – defined by economists as two consecutive quarters of negative growth – in the spring of 2009.

The economy has since struggled to gain momentum in the face of the euro zone debt crisis, which has sapped business and consumer confidence.

Uncertainty over the fate of the euro and related problems in credit markets have resulted in consumers and investors either cancelling or delaying major spending decisions.

This has hit the construction and automobile industries in France particularly hard. New housing starts in the second quarter were 14 per cent below 2011 levels while July car sales were down 7.0 per cent on a year earlier.

With these job-intensive sectors struggling, unemployment has spiked.

Latest figures put the jobless total at nearly 10 per cent of the work force with a further 5.0 per cent working fewer hours than they would like.

Faced with an economy deteriorating on almost every front, the Socialist government was last month forced to cut its growth forecast for the full year from 0.4 to 0.3 per cent, and from 1.7 to 1.2 per cent for 2013.

Even the revised prediction however is considered optimistic by the International Monetary Fund (IMF) and the Bank of France’s latest survey will have made uneasy summer holiday reading for President François Hollande.

Elected in May on a jobs and growth ticket, Mr. Hollande faces an increasingly tough battle to deliver while simultaneously meeting a commitment to reduce France’s budget deficit in line with euro zone requirements.

Before embarking on their holidays last week, government ministers were issued with spending ceilings for the next 12 months which will require major cuts in all but a handful of departments.

France is seeking to reduce its public deficit – the shortfall between revenue to spending – from around 4.5 per cent of GDP this year to the EU limit of 3.0 per cent by the end of 2013.

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