French central bank sees flat economy in first quarter

PARIS Fri Mar 8, 2013 1:28pm GMT

Tourists protect themselves from the rain under umbrellas in front of the Eiffel tower as they visit the French capital during summer holidays in Paris July 19, 2011. REUTERS/Eric Gaillard

Tourists protect themselves from the rain under umbrellas in front of the Eiffel tower as they visit the French capital during summer holidays in Paris July 19, 2011.

Credit: Reuters/Eric Gaillard

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PARIS (Reuters) - France will barely dodge recession in the first quarter of the year, with the weak economy hurting the government's efforts to rein in the budget deficit, data showed on Friday.

In a monthly survey, the central bank maintained its forecast of 0.1 percent growth in the January to March period for the euro zone's second biggest economy, which contracted by 0.3 percent in the last quarter of 2012.

That in turn is hitting state revenues, with receipts from sales tax tumbling 4.4 percent in January in a sign of strained household spending, other data showed.

Overall, the central government budget deficit widened in the first month of the year to 12.8 billion euros ($16.75 billion) from 12.5 billion a year ago.

The sharp drop in VAT revenues - which accounted for two thirds of state revenues in January - could compromise France's fiscal targets even further, analysts said. Paris has already said it will ask the European Union for an extra year to bring its budget deficit within the bloc's 3 percent of GDP limit.

Ludovic Subran, chief economist at credit insurer Euler Hermes, said the VAT revenue drop showed spending by middle and higher income earners was starting to come under pressure after a period of resilience.

"We are starting to hit the limit of France's strength in raising taxes," he said. "All of this puts public deficit targets at risk."

The Bank of France's GDP forecast for the first quarter is in line with the European Commission's prediction of a mere 0.1 percent expansion for the full year, close to the European Union average.

Germany, the bloc's economic powerhouse, is expected to post growth of 0.5 percent.

France's Socialist government backtracked last month on its growth and deficit targets for 2013, admitting that GDP growth would be closer to 0.2-0.3 percent than the 0.8 percent forecast on which it built its budget.

The government, which said on Friday it would update its forecast for budget revenue and spending in mid-April, is also scrambling to find more savings for 2014 and is expected to slash its 2 percent growth forecast for 2014.

France now aims to bring its budget deficit down to the 3 percent of GDP threshold in 2014 instead of 2013 as previously targeted.

Business confidence rose in the industry sector by one point to 96 in February in the central bank survey. The bank forecast that industrial activity would remain stable in March after improving somewhat in February.

The same confidence indicator fell two points to 88 for the services sector, with forecasts of a slight fall in activity in March, with one bright spot being a stabilization of temporary employment after several months of contraction.

France is struggling with a relentless rise in unemployment, with the jobless rate at its highest level in more than 13 years, piling pressure on President Francois Hollande who has pledged to reverse the upward trend by year-end.

(Editing by Catherine Evans)

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