UPDATE 2-French morale hits record low, state coffers to suffer
* Household morale at lowest since records began in 1972
* State auditor says weak demand threatens deficit goal
* Auditor says reforms needed to slash public spending
(Adds detail on retail sales, auditor recommendations)
PARIS, June 27 (Reuters) - French consumer confidence has hit an all-time low just as the state auditor warned that a likely economic contraction would knock the government off-course from this year's deficit reduction target.
June consumer confidence fell to the lowest level since records began in 1972 and households are more pessimistic than ever about their future living standards, according to an index released on Thursday by national statistics institute INSEE.
The trend suggests that Europe's second-biggest economy, hit by lagging trade competitiveness and caught in a shallow recession, will not be able to count on its traditional driver of consumer spending to rebound.
The European Commission's June economic morale index for the euro zone on Thursday also showed French consumer morale falling, to -30.9 from -29.9, lagging other sectors of the country's economy. The overall index for the euro zone, which also covers industry and services, hit its highest level in over a year.
France's Cour des Comptes, a quasi-judicial body that oversees state accounts, warned in an annual review that with the public spending deficit heading for nearly 4 percent of economic output this year, missing a 3.7 percent official target, structural reforms must be implemented immediately to cut spending.
"Large doubts weigh on the flow of corporate and sales tax revenues," the auditor said in its 250-page review.
The body's president, Didier Migaud, told lawmakers as he presented the document that "reforms enabling a reduction in the weight of public spending seem more necessary than ever."
French GDP shrank 0.2 percent quarter-on-quarter in the first three months of the year, INSEE data confirmed this week. The government sees full-year growth at 0.1 percent, but INSEE and the European Commission both forecast a 0.1 percent drop.
The June consumer confidence index came in at 78, three points below analyst expectations of 81 and far below a long-term average of 100, data from statistics office INSEE showed.
Households' views on how their living standards would evolve were at the lowest in over four decades. More people said now was a good time to save and fewer planned major purchases.
The gloom is being driven by record-high jobless claims and growing doubts that President Francois Hollande can make good on a promise to reverse the unemployment trend by year-end.
Adding to the bleak mood, weeks of cold and rainy weather have left retailers with huge stocks of unsold summer clothes, forcing them to offer huge discounts of up to 80 percent as sales kicked off this week, though store owners said even rock-bottom prices were having limited impact.
"It's really terrible. Sales are really low, we've never seen such a drop," said Celeste Touboul, surrounded by "Sales" signs in one of two shops brimming with dresses, tops and bags which she runs with her husband in central Paris.
"Don't even talk to me about the weather, it killed us even more, the season is ruined," Touboul said.
AUDITOR EYES WASTAGE
France's national council of shopping centres, which represents 36,000 retailers in 750 malls, said 14-14.5 million people attended the first day of the summer sales on Wednesday, down slightly from 15 million a year ago.
Discounts were on average 10 percent greater than last year, the council's head, Jean-Michel Silberstein, told Reuters.
Touboul said however that her turnover on Wednesday was 50 percent less than in normal years.
INSEE said last week that with subdued consumer demand weighing, growth would be too weak this year for the economy to start creating new jobs. It also forecast that the unemployment rate would rise to 11.1 percent by year-end, up from 10.8 percent today and just shy of a 1997 record of 11.2 percent.
French consumer spending fell last year for the first time in 19 years. INSEE will publish May spending data on Friday.
The economic weakness raises the pressure on Hollande to meet cost-cutting goals, the Cour des Comptes said, laying out a series of areas where it suggested more savings could be made.
Trimming more public sector posts, or forcing the country's 5.3 million public sector workers to put in two extra hours a week, could save more than a billion euros a year, while pegging annual increases in social benefits a percentage point below inflation could save similar amounts, its review said.
Local authorities, unlike the central government, had failed to keep a lid on staff costs and other spending it said, and too much public moneyfile:///C:/Documents%20and%20Settings/stephen.nisbet/Local% 20Settings/Application%20Data/Thomson%20Reuters/TRD%206/News/Pag esHtml/Story.htm# was being wasted in aid to state TV and radio and well-heeled sports federations including football clubs.
Migaud said France was only just starting to improve its credibility regarding public finances after a decade of waywardness and it was important not to slip back now.
"As long as we have high debt we will be in a dangerous zone which leaves us exposed if interest rates rise," he said.
(Additional reporting by Dominique Vidalon; Writing by Catherine Bremer; editing by Stephen Nisbet)