French economy stagnates in second quarter

French economic growth ground to a halt as household spending shrank in the second quarter, raising pressure on the government to announce cutbacks to convince turbulent markets it will deliver on debt reduction targets. France's statistics office said GDP growth was zero in the April-June period versus first quarter growth that, at 0.9 per cent, was the best in almost five years. The main cause was a drop in household consumption, which was down 0.7 per cent from the first quarter, a particularly worrying sign for an economy that, unlike Germany's, is heavily reliant on domestic demand. Economists polled by Reuters had on average predicted a rise of 0.3 per cent. The French report comes ahead of similar readout for Germany and the Eurozone on August 16. Barclays economics department said the French figure could drag the Eurozone result lower than a consensus forecast of 0.3 per cent. Philippe Waechter, an economist at Natixis Asset Management, said France would need to generate growth of 0.5 per cent in both the third and fourth quarters to reach its target of 2.0 per cent growth overall this year, and that may not happen. The Bank of France sees third quarter growth of 0.3 per cent. Chris Williamson, economist at British-based consultancy Market, said a second-quarter GDP drop had always been on the cards after a bumper first three months. "But it is clear that the recovery has weakened significantly in recent months," he said. After the European Central Bank moved last week to defend the bonds of Italy and Spain, market fire turned on France amid rumour and counter-rumour about the health of its banks and the solidity of a AAA credit rating that allows it to finance its sovereign debt as cheaply as possible in markets. French Finance Minister Francois Baroin played down the poor performance, saying it was no surprise after a strong first quarter. He said the government would not downgrade its growth forecasts and would meet its targets for debt reduction after President Nicolas Sarkozy ordered his ministers on Wednesday to find new ways to prune the public deficit. With presidential elections less than nine months away, the minister strove to strike a balance between market demands for convincing deficit-reduction and voter concern excessive austerity will hit household budgets and undermine France's tradition of generous welfare provision. "What we have to do despite the budget tensions and the difficulty of this process is find savings that won't hurt the most vulnerable or the economy," Baroin told RTL radio. Austerity measures have sparked protests in other European countries, above all Greece. The government's debt-cutting plan is based on GDP growth of 2.0 per cent in 2011, 2.25 per cent in 2012 and 2.5 per cent on average in each of 2013 and 2014. A recent IMF report gave a somewhat less rosy picture of 2.1 per cent for 2011, 1.9 per cent in 2012 and 2.0 per cent for 2013.