PARIS (Reuters) - Business morale in France's manufacturing sector slumped in October to its lowest level in over two years as export demand from the euro zone weakened, adding to signs the bloc's No. 2 economy is contracting.
National statistics institute INSEE said on Tuesday its indicator for morale in the manufacturing sector slumped to 85 in October, worse than the lowest estimate in a Reuters survey of 23 economists. The poll had forecast business morale would be unchanged from last month at 90.
The indicator was dragged lower by a sharp deterioration in survey responses relating to total orders and demand, which slumped to -39 from -28 in September - dragged lower by the deepening recessions in southern euro zone nations such as Italy and Spain, which rank amongst France's main export markets.
Foreign orders and demand slid to -36 from -27 previously.
"The sharp deterioration in business sentiment confirms indications at an EU-wide level that some of the weakness which we had projected in the third quarter and did not materialise will probably become apparent in the fourth quarter," wrote Unicredit analyst Tullia Bucco.
She said France's gross domestic product (GDP) may have contracted by less than her forecast of -0.2 percent in the third quarter but the reading for the fourth quarter would be below her forecast of flat.
France's 2-trillion-euro economy has posted zero growth in the last nine months but many economists now expect it to join southern Europe in recession in the second half of 2012.
INSEE's composite business morale indicator - which includes building, wholesale, retail and services - slipped slightly to 85 in October from 86 the previous month. It was the lowest reading since August 2009.
The data came after the PMI purchasing managers index for September showed France's manufacturing sector shrinking at its fastest rate in three-and-a-half years, hit by weaker foreign demand and high unemployment.
The flagging health of France's manufacturing sector, which accounts for around 12 percent of economic output, has become a top priority for France's Socialist government as it attempts to curb unemployment running at a 13-year high.
A government-commissioned report by the former CEO of EADS Louis Gallois, due on November 5, is expected to recommend easing taxation on labour. France has some of the highest labour charges in the world, yet the government has so far shown itself unwilling to cut the charges, which finance the welfare state.
(Reporting by Daniel Flynn; Editing by Catherine Evans)