PARIS MARKETS:FRENCH ECONOMIC growth ground to a halt as household spending shrank in the second quarter, pressuring the government to announce cutbacks to convince turbulent markets it will deliver on debt reduction targets.

France’s statistics office said gross domestic product growth was zero in the April-June period versus first quarter growth that, at 0.9 per cent, was the best in almost five years.

The main cause was a drop in household consumption, which was down 0.7 per cent from the first quarter, a particularly worrying sign for an economy that, unlike Germany’s, is heavily reliant on domestic demand.

The French report comes ahead of similar readout for Germany and the euro zone on Tuesday. Barclays’ economics department said the French figure could drag the euro zone result lower than a consensus forecast of 0.3 per cent.

Philippe Waechter, an economist at Natixis Asset Management, said France would need to generate growth of 0.5 per cent in both the third and fourth quarters this year to reach its target of 2.0 per cent growth overall, and that may not happen.

The Bank of France sees third quarter growth of 0.3 per cent.

After the European Central Bank (ECB) moved this week to defend the bonds of Italy and Spain, market fire turned on France amid rumour and counter-rumour about the health of its banks and the solidity of the “AAA” credit rating that allows it to finance its sovereign debt as cheaply as possible in markets.

ECB sources said it was impossible to foresee when the bank’s bond purchasing programme for Italy and Spain would cease. By definition it was an unconventional measure, and it was up to governments to make the necessary fiscal adjustments and reforms.

French finance minister Francois Baroin played down the poor performance, saying it was no surprise after a strong first quarter.

He said the government would not downgrade its growth forecasts and would meet its targets for debt reduction after President Nicolas Sarkozy ordered his ministers on Wednesday to find new ways to prune the public deficit.

With presidential elections less than nine months away, the minister strove to strike a balance between market demands for convincing deficit-reduction and voter concern that excessive austerity will hit household budgets and undermine France’s tradition of generous welfare provision.

“What we have to do despite the budget tensions and the difficulty of this process is find savings that won’t hurt the most vulnerable or the economy,” Mr Baroin told RTL radio.

Austerity measures have sparked protests in other European countries, above all Greece. – (Reuters)