INSEE: France In Recession From 3Q On Global Slowdown,Turmoil

PARIS -- The global economic slowdown and its associated financial turmoil are set to push the French economy into a recession in the third quarter, central statistics office Insee said Friday.

After shrinking 0.3% in the second quarter, the gross domestic product of the euro zone's second-largest economy will fall 0.1% in the two final quarters of the year, Insee said. However, on a yearly basis, the French economy is still expected to grow 0.9%.

"The world's growth is slowing, and that's affecting exports, plus the financial crisis is deepening," said Eric Dubois, Insee chief forecaster. "Uncertainty is shortening the span of our outlook."

The picture painted by the Insee is bleak: as the credit markets dry up and foreign countries cut their purchases of French products, investment is bound to fall and consumption to go flat, as unemployment rises.

The French economy has undergone only two recessions - defined as two consecutive quarters of contraction - since World War II: in 1975 and in 1992-93. GDP has contracted in nine quarters in the past 28 years, but never for three straight quarters, Dubois said.

"The key point in the scenario is the financial crisis: how long it's going to last, and how much damage it'll leave behind once it's over," said Laurence Boone, chief economist at Barclays Capital in Paris. "When it ends, it's still going to take as long as one year before lending goes back to normal."

For the end of the year, Insee sees unemployment reaching 7.8%, up from 7.4% now. That, in turn, will affect consumer confidence and consumption, the main drive of French growth, which Insee sees flat until the end of the year.

While consumption will still gain 0.8% on the year, that's significantly less than the 2.5% increases seen in 2007 and 2006.

The credit markets freeze hit France roughly earlier this week, forcing the government to spend EUR3 billion to rescue Dexia (DEXB.BT), a Franco-Belgian bank.

Dubois said the credit squeeze is sifting through to the real economy, with banks cutting lending facilities to companies and households.

On the up side, inflation has peaked, Insee said. Pushed down by slowing demand, prices will post a 2.4% year-on-year increase in December, well below the 3.6% increase of June, a 17-year high. On a yearly basis, the average rate for this year will be 3.0%, Insee said.

The Insee forecast is consistent with a stream of negative data piling up in recent months.

Industrial production, which represents about 20% of French GDP, was down 2.1% in the three months up to July.

Consumer spending on manufactured goods, a good gauge of total consumption, contracted 0.3% in August on the month, after higher inflation pushed consumer confidence to a record-low in July.

-By Gabriele Parussini, Dow Jones Newswires; +33 1 40 17 1770; gabriele.parussini@dowjones.com.