Bank of France warns of recession

The French economy suffered two setbacks on Friday when the central bank warned of a slight recession and official data said that industrial output fell sharply in September. France is heading for a slight recession at the end of the year, the Bank of France forecast. In another gloomy announcement, the statistics institute INSEE reported that industrial output fell by 2.7 percent in September after a jump of 1.9 percent in August and that industrialists were planning further reductions of investment. The central bank estimated that total output would shrink by 0.1 percent in the last quarter, after an estimated setback of about the same amount in the third quarter. In the previous three quarters gross domestic product was flat. This latest outlook underlines strains in the economy and comes in a week marked by a big effort by the government to reverse the falling competitiveness and a huge structural trade deficit. Two of the main factors of growth in an economy are investment, and exports minus imports -- a trade surplus. The main thrust of new measures is to switch the cost of paying for social security and health benefits from employers to a wider tax base, and also to reduce public spending. One brighter note came from the budget ministry which said that the budget deficit of the central French state, part of the overall public deficit, had fallen by 7.7 billion euros on September 30 on a 12-month basis to 85 billion euros. It said that this was "coherent with the expected reduction." INSEE said that regarding the industrial setback in September, output by manufacturing, excluding the mining and energy sectors, fell by 3.2 percent after a rise of 2.1 percent in August. For the whole of the third quarter, overall industrial output was flat from output in the previous quarter. However manufactured output in the quarter, on a 12-month comparison, fell by 1.9 percent. INSEE also reported that French industrialists, who had revised down sharply their investment programmes for 2012, were now planning on reducing their investment in equipment next year. The central bank's overall growth estimates are in line with those of INSEE and would mark the first recession since France was hit by the financial crisis in the first part of 2009. A recession is considered to occur when output from one quarter to the next contracts for two quarters in a row. And emergence from recession, then a return to contraction within a few years, is commonly referred to as a double dip. If output is flat or contracts for five quarters in a row, as the latest estimates indicate, this would be unprecedented in France since World War II. INSEE expects the economy to have grown over the whole of 2012 by 0.2 percent, slightly less than the figure given by the government in its effort to reduce the public deficit to 4.5 percent of output at the end of the year. Strong growth is important because it leads to higher tax revenues and to lower charges for benefits such as unemployment. The latest estimates put France on a gloomy footing for the beginning of 2013. The government repeated on Thursday that it was counting on the economy growing by 0.8 percent next year, but economists consider this to be optimistic. So does the European Commission which revised down its forecast for next year this week to 0.4 percent, half the government's figure.