French economy suffers drop

FRANCE’S economy contracted in the second quarter as the dollar’s drop stifled exports and consumer spending fell, pushing the economy of the 12 countries sharing the euro to the brink of recession.

Gross domestic product in France, Europe's third largest economy, shrank 0.3%, state statistics office Insee said in Paris.

The slump means the euro region's $8 trillion economy likely contracted for the second time since the currency was introduced in 1999, said the EU statistics office.

Rising unemployment and a drop in exports after the euro's 16% gain against the dollar in the past year left Europe's economy lagging the US and Japan in the second quarter.

Germany, Italy and The Netherlands were all in recession in the first half after shrinking for two quarters.

"We will at best crawl slowly out of the slump," said Peter Lockhofen, who helps manage the equivalent of $3.3 billion at DZ Capital Management GmbH in Frankfurt.

The decline in French GDP economists had forecast no change means the EU statistics office will probably revise its estimate of stagnation in the second quarter to a contraction of 0.1%, said the Eurostat official. The report will be published on September 9.

France's economy has outpaced the euro region average since 1997, with GDP growth of 1.2% last year compared with 0.2% in Germany and 0.4% in Italy.

Consumer spending, boosted by tax cuts as France's government broke EU deficit limits, shored up growth in 2002 and in the first quarter.

As the effect of tax cuts tapered off, government workers staged strikes and unemployment rose. Consumer spending fell 0.2% in the second quarter after an gain of 0.5% in January through March. It was the first contraction since the fourth quarter of 1996.

France's benchmark stock index, the CAC 40, fell 0.5% to 3292.88. The yield on the benchmark 10-year French government bond fell 3 basis points to 4.12%.

Companies including Schneider Electric SA, the world's largest maker of circuit breakers, have been cutting jobs, production and investment to weather the slump in sales.

French exports declined 0.6%, the statistics office said. Net trade erased 0.2 percentage point from growth during the quarter. Imports were unchanged in April through June.

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