French economy stumbles as business morale dips

PARIS (Reuters) - France's economy flatlined in the first half of 2012, President Francois Hollande said, prioritising a return to growth as data showed a worsening business climate weighed down in part by looming tax hikes introduced by his government.

A high rate of expansion was needed to bring down unemployment and "we need to do everything we can to generate lasting growth for the years ahead," Hollande told a conference on industrial relations on Monday.

Earlier, the country's central bank said it expected the euro zone's second largest economy to have shrunk by 0.1 percent in the second quarter after posting zero growth in the first three months, sticking with last month's forecast.

The latest signs the near 2 trillion euro ($2.5 trillion) economy is flirting with recession, while unemployment sits at a 13-year high, will add to pressure on Hollande.

His Socialist government was elected in May promising to avoid the painful bouts of austerity that have multiplied across other parts of Europe.

But France's slowdown has hit state revenues, and in his first major set of economic measures last Wednesday, Hollande announced tax rises worth 7.2 billion euros, singling out large companies and the rich.

"French business confidence remains low due to an anaemic domestic market and (the) new taxes announced (last week)," ING economist Manuel Maleki said. "Moreover, the poor international climate and the uncertainty regarding the future of the euro zone have hit (the index)."

The central bank said on Monday its monthly business sentiment indicator fell in June to its lowest since late 2009, when the economy was emerging from its worst post-war slump.

Sentiment for the industrial sector eased to 91 from 92 in May with a decline in the auto industry offset by rises in pharmaceuticals and the agro-food industry. Services sentiment fell to 90 from 92 with the outlook for the coming months clouded by high uncertainty.

Facing deteriorating business conditions, many French companies are slashing their headcount and the CGT union fears as many as 75,000 further jobs may be on the line.

The INSEE official statistics agency forecast last month that the economy would stagnate in the first half of the year and eke out meagre growth in the second, avoiding a full-blown slump.

($1 = 0.8126 euros)

(Reporting by Leigh Thomas; Editing by John Stonestreet)