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French Second-Quarter Growth Slower than Expected

The French economy grew at a disappointing pace in the second quarter, held back by sluggish exports and stagnant business investment, official data showed on Tuesday, raising fears about the outlook for the year.

Gross domestic product climbed 0.3%, national statistics office INSEE said, weaker than the 0.5% forecast by economists in a Reuters poll and an unrevised 0.5% rise in the first quarter.

"The lesson from the data is that growth is weak. The 2% growth that we were expecting for the entire year will be hard to achieve," said Philippe Brossard, economist at Euler Hermes.

The government is relying on a pickup in economic growth to meet its budget goals and the 2007 budget forecast is based on an assumption of 2.0% to 2.5% growth this year.

The report was also far weaker than a Bank of France forecast from July for second quarter growth of 0.6%.

Consumer spending, the mainstay of recent economic activity, climbed 0.6%, up from 0.5% in the first quarter, INSEE said.

But this was counterbalanced by weak trade and investment. Business investment was flat after rising 1.4% in the first quarter.

"From what I have seen, deceleration in investments was concentrated on equipment goods," said Tullia Bucco, economist at Unicredit MIB. "This was very disappointing given indications from capital goods imports that they would remain resilient throughout the quarter."

Foreign trade was down 0.3% as a surge in imports outweighed a solid rise in exports.

"Exports were not great but what we're seeing again is the strength of imports," said Sonia Pangusion, senior economist, Global Insight. "The figures today confirm that France is consuming without producing."

Bosses complain the strong euro is making business difficult and President Nicolas Sarkozy has repeated those concerns.

The report follows the release earlier on Tuesday of a below-forecast German growth report for the second quarter. GDP also grew by just 0.3% on the quarter as construction investment fell. But there, a rapid bounceback is predicted.

"The figures for the second quarter are not going to look very good for the euro zone as a whole," said Pangusion.

In a separate report, INSEE said French consumer prices fell 0.3% in July month-on-month and rose 1.2% year on the year. Both numbers were weaker than expected and suggest inflation is contained.

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