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French economy contracts 0.1 percent in setback for Hollande

French President Francois Hollande leaves after the weekly cabinet meeting at the Elysee Palace in Paris, November 13, 2013. REUTERS/Philipp
French President Francois Hollande leaves after the weekly cabinet meeting at the Elysee Palace in Paris, November 13, 2013. REUTERS/Philipp

By Leigh Thomas

PARIS (Reuters) - France's economy unexpectedly returned to contraction in the third quarter as investment dropped, dealing a new blow to President Francois Hollande's efforts to revive the euro zone's second biggest economy.

The 2 trillion euro ($2.7 trillion) economy shrank 0.1 percent in the quarter, slowing sharply from growth of 0.5 percent in the previous three months, the INSEE statistics agency said on Thursday.

The preliminary reading fell short of expectations for slight growth of 0.1 percent, according to a Reuters poll of 22 economists.

Economic activity was widely expected to slow after the economy surged out of a shallow recession in the second quarter because of one-off factors like exceptionally high electricity production brought on by particularly cold weather.

"The new contraction in activity will definitely not help President Hollande to improve his popularity among the electorate - which currently stands at a record low," said economist Diego Iscaro with consultancy IHS.

"Moreover, the weakness of the economy may make it more difficult to achieve consensus to go ahead with the structural reforms the French economy badly needs," he added.

INSEE reported that domestic demand was flat in the third quarter while investment fell 0.6 percent and household spending rose 0.2 percent.

Stock rebuilding by companies had a positive effect, adding 0.5 percent to output while rising imports and falling exports meant foreign trade put a 0.7 percent drag on the economy.

Finance Minister Pierre Moscovici said that the weak third-quarter reading was due to temporary factors like a slowdown in aircraft orders and he stuck with his forecast for growth of 0.1-0.2 percent over the whole of 2013.

"The productive forces are starting up again, production is recovering," Moscovici said on RTL radio. "We knew the third quarter would mark a pause, it's not a surprise, it's not an indicator of decline, it's not a recession."

Hollande's government faces growing concerns about its ability to revive growth with Standard & Poor's cutting France sovereign rating to AA from AA+ last Friday over such doubts.

Adding its voice to a growing chorus calling for France to carry out more reforms, the OECD said on Thursday that France was falling behind southern European countries that have overhauled their economies to become more competitive.

(Reporting by Leigh Thomas; Editing by James Regan and Mark John)

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