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French growth sputters to a halt in 2nd quarter

By Greg Keller

Associated Press

Published: Friday, Aug. 12 2011 5:45 a.m. MDT

A stock trader looks on the graph displaying activity on the French Stock Exchange, left, and the Japanese Nikkei Index, right, in Paris, Friday, Aug. 12, 2011. The French economy posted zero growth in the second quarter, national statistics agency INSEE said Friday. Government economists had forecast growth of around 0.2 percent in the period.

Michel Euler, Associated Press

PARIS — The French government was put under further pressure to cut deeper into spending after figures Friday showed growth in Europe's second biggest economy ground to a halt in the spring, in another sign that the global economy is facing rising recessionary threats.

With the worse-than-expected French growth figures suggesting a possible budget shortfall this year, government ministers may have to find additional savings ahead of a key meeting with President Nicolas Sarkozy on Aug. 24.

The flat growth reported in the second quarter of the year was attributable to a slump in consumer spending and exports, and came as policymakers scramble to soothe investor concerns that the country could be the next major economy to lose its coveted triple-A credit rating.

A move Friday by stock market regulators in France and elsewhere across Europe to ban short selling — a form of stock market speculation that some are blaming for the turbulent trading in recent days — looked to be having some impact.

But economists stressed that any rebound was very fragile, and some derided the ban as misguided and ineffective.

French bank shares were performing solidly in Paris, with Societe Generale up nearly 3 percent and Credit Agricole up over 1 percent. Over the past couple of days, French bank stocks, and Societe Generale in particular, have been hugely volatile amid rumours of their financial health.

The European Union's markets supervisor, the ESMA, announced the short selling ban late Thursday night after boosting surveillance of stormy markets earlier in the day. In a short sale, a trader hopes to make a profit by betting on the decline in the price of a share.

Regulators in France, Italy, Spain and Belgium are each implementing the bans, whose details vary from country to country.

Several countries banned short selling during the financial crisis of 2008 to try to tame volatility. But some experts said the bans actually contributed to a feeling of uncertainty.

"The decision (of short-selling ban) is more psychological as it seems to strengthen the position of the regulators compared to the speculators," said Dominique Dequidt, a fund manager at KBL Richelieu trading house in Paris. "But the speculators have found ways to by-pass this shorting ban for the last two years, when it was in place in the past so this measure seems more like a complete waste of effort towards the speculators."

News that French economic growth sputtered to a halt in the second quarter may raise concerns that the European economy is being impacted by the debt crisis that has afflicted a number of countries and has fueled the turmoil in the markets.

Separate figures from Eurostat, the EU's statistics office, showing that industrial production across the 17-country eurozone fell by 0.7 percent are likely to add to market concerns over the pace of the economic recovery in Europe.

The French economy posted zero growth in the second quarter, national statistics agency INSEE said. Government economists had forecast growth of around 0.2 percent in the period. Consumer spending slumped 0.7 percent and exports stagnated during the second quarter. Growth in the first quarter was nearly 1 percent.

Views on the weak performance were mixed, with warnings that a stagnant economy will make it harder to reduce the deficit.

"As for France itself, Q2's 0.7 percent drop in consumer spending was the sharpest in nearly 15 years, suggesting that the household sector can no longer be relied upon to support the economy," said Jennifer McKeown, an economist at Capital Economics in London.

However, Laurence Boone of Bank of America Merrill Lynch remained "positive on France overall" based on its careful handling of debt in the past.

"Gradual reforms should bear fruit in coming years, but more needs to be done," Boone said.

France's finance minister took to the airwaves again Friday in a bid to put a positive spin on the weak second-quarter numbers.

"It's not a surprise that the second quarter is worse than the first, we anticipated this," Francois Baroin said on French radio station RTL. He said the government is sticking with its deficit reduction targets despite the lower growth.

Baroin also pledged France would still achieve its target of 2 percent growth this year, which many economists are skeptical about.

Flagging growth may mean France has to come up with new budget cuts if it is to bring its deficit down to 5.7 percent this year as planned.

In Greece, where Europe's debt crisis began, statistics released Friday show the country is mired in a deep economic recession, contracting by 6.9 percent in the second quarter compared to the same period last year, on lower consumer spending.

And in Italy, Premier Silvio Berlusconi's government is holding an emergency meeting Friday to approve new measures to balance the budget by 2013 and calm market concerns over Italy's public finances.

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