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French economy to shrink 0.4% in 2009

The French economy will shrink 0.4% in 2009, the OECD forecast, ditching its previous prediction of 1.5% growth.

The euro zone's second-largest economy has so far avoided the recession which has hit neighboring Germany and the wider euro zone, with GDP unexpectedly rising 0.1% in the third quarter this year.

But the Organisation for Economic Cooperation and Development said sharply deteriorating global economic conditions meant the country was clearly heading into recession. “The impact of this turbulence will reverberate well into 2009, with negative growth expected until the middle of the year,” the Paris-based think tank said in its twice-yearly Economic Outlook.

This recession would push unemployment from 7.3% this year to 8.2% in 2009 and 8.7% in 2010, the OECD predicted.

The government's budget deficit would also rise to 3.7% of GDP next year, above the European Union ceiling of 3%, before it rises to 3.9% in 2010.

“Significant widening of the general government deficit is expected in both 2009 and 2010, despite the announced tightening of fiscal policy over the next few years,” the report said.

“The scope for additional discretionary measures is limited by (France's) poor public finance position and prospects. The focus on expenditures control and reform of the public administration should be maintained,” it added.

The French government is considerably more optimistic about its deficit breach, with budget minister Eric Woerth expecting it to hit only 3.1% of GDP in 2009.

But due to the gravity of the world economy, the excess may not matter much this time as the EU has said it would be flexible on its deficit rules on a country-by-country basis.

The OECD also said the economic slowdown should help to limit further increases in wages. It expected wage growth to slow to 1.6% in 2009 from 3.5% this year. (Reuters)